Have you ever taken out a large loan and been worried that you are only barely able to make the payments?  Then, two weeks later you hear that the firm you work for is downsizing, and you know that you could never afford the loan payments if you lost your job. How can you protect yourself from this very difficult, but all too common, financial dilemma?

One solution currently offered by creditors is called Consumer Credit Insurance (CCI). This insurance policy covers your loan payments in the event that you are not able to make them due to personal hardship. Consumer Credit Insurance is the broad term that refers to this type of insurance; a more narrow definition would include mortgage protection insurance, loan (including auto loan) insurance, and credit card insurance.

Features Of A Consumer Credit Insurance Policy

As with any type of insurance, there are a variety of features that need to be considered before buying the policy. An uninformed insurance purchase can create many headaches down the road, especially when the policies have broad exclusions to receiving benefits. Some things you need to consider about a Consumer Credit Insurance policy include:

Hardships Covered- Most CCI policies cover three types of hardships:

• Death
• Involuntary Unemployment
• Illness or Accident

While these three hardships are the standard for the industry, realize that not every policy will include each one. If you want to save some money on the policy and have enough savings to live on if you become unemployed, you may choose a lesser plan that only covers in the event of death (to protect your family even after you are gone). Be sure you understand what hardships are covered before you purchase the policy.

Exclusions- Be sure to ask the insurer about the exclusions to the policy. For example, if you work in a dangerous occupation, the insurance company may exclude your work-related injury claim. Also, the policy may exclude certain illnesses, especially if they claim you had a “pre-existing condition”. Be well informed of the exclusions before purchasing any policy.

Amount of Coverage- This feature is especially important if the insurancepolicy is your mortgage insurance. All CCI policies will limit the amount that they will pay out in benefits. This is normally defined as both a maximum period of time (for example, 24 months), and a maximum amount of overall coverage (for example, $200,000). Since the policies are typically sold along with the loan, you will normally take out a policy that is just large enough to cover the loan, whether it is a $20,000 car loan or $200,000 mortgage payment.

Cost Compared To Other Policies- While CCI may sound like a good idea so far, it is important to understand that there may be better deals out there. The Australian Securities & Investments Commission has reported that the cost of life coverage under a CCI policy is two to four times more expensive than term life insurance.

What Fits Your Needs?

In the end, the best decision is the one that fits your personal financial needs the best. If you already have sufficient coverage, you may not need such a policy; however, if you do not have much insurance to cover you, this may be a good choice. Since one small clause or exclusion can prevent you from collecting the benefits you have paid for, be sure to discuss the topics above with your insurer before buying the policy.

Photo by sean dreilinger

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