The credit insurance(popularly known as payment protection insurance), originally developed in USA, has witnessed a spectacular growth throughout the world. This is because of enormous presence of credit culture in the western economies and subsequent protection for the lenders & consumers against the unforeseen events such as death, disability and unemployment of consumers losing his ability to repay the loan.
The term is primarily associated with a specific loan or line of credit that’s design to mitigate the risks of the lender. And in today’s credit happy society, its very much relevant. Apart from the lender’s point of view of safe-guarding their financial interests over the lending money, borrowers ought to confirm that their families are safe and won’t be in a debt trap.
Just imagine, you are permanently disabled and have lost your job or steady flow of income and/or any extremity has happened to your life, what would be the miseries prevail in your family? And here comes the essence of credit (protection) insurance.
Although in today’s credit happy world, this type of insurance is much common, you have to make sure that you have the proper credit plan that could adequately safe-guard you. In this case, its not only you who’s an insurable interest, creditor or lender has a legal insurable insurance on your life (as a borrower or debtor).
Credit insurance may be of three kinds, depending on the type of credit.
**Decreasing Term Coverage for close-ended installment payment system. This is normally seen in case of mortgage, automobile, consumer, educational lending where the load balance decreases with repayment at regular intervals.
**Ordinary Term Coverage for single payment loan where the loan repayment practice is in a single lump sum amount (single premium credit insurance) and the outstanding amount won’t decrease.
**Varying Amount Insurance Coverage in open-ended nature where the credit amount varies from month to month such as credit card loan. Normally the mortgage and loan-based credit insurance are more popular than varying amount credit insurance(open-ended). Make sure that at-least your loan amount must be covered by the credit insurer as a large portion of your borrowings may remain uncovered due to certain upper limit of coverages from the credit insurance company.
The important coverages are-
1. Death: In case of borrower’s death, the claim amount is paid to the creditor or lender.
2. Disability: Claim, arising out of disability, is payable as per definition or contract of insurance which is again subject to a specific waiting or elimination period.
3. Unemployment: The benefit is payable if the borrower’s lost his job, may be due to termination, lay-off, strikes, labor disputes. But the majority of credit insurance plans do not cover the conditions such as retirement, resignation or illness.