When you take out a mortgage, loan, or line of credit for your small business, your lender may ask you to purchase an insurance policy known as credit protection or creditor insurance. The purpose of this policy is to help you repay your loan or other debt balances in case of death, disability, illness, or job loss.
How does creditor insurance work?
When you apply for a loan, you will also complete an application for a creditor insurance policy. Your lender will review your application and set a monthly premium that’s based on your age, the balance of debt you owe, and sometimes, an assessment of your health.
If you agree to the policy that’s offered, you’ll begin to make flat monthly premium payments. You may choose to have those payments added to your loan, which will increase your monthly loan payment amount.
If you die or become unable to perform income-generating work due to a specific life event, your policy will repay your lender for the debts you owe. Excess benefits are unlikely, but if they exist, they may be distributed to you or other named beneficiaries.
Can I decline coverage?
Yes, creditor insurance is optional. Some lenders may pressure you to buy it, but they are legally prohibited from making its purchase a condition of your loan approval.
How can I determine if it’s right for me?
As with any insurance policy, you should look into the premium, coverages, and terms of cancellation. The following questions may help you assess the offering and decide if it’s right for you:
- Will I need a health screening to qualify for a policy?
- Will preexisting conditions prevent me from attaining a policy?
- What is the cost of the premium?
- Can I include the premium in my monthly loan payment?
- Will including the premium affect the interest or points I’m paying on the loan?
- Will the policy cover the full term and balance of the loan?
- What life events must occur in order to receive the benefit?
- Will the benefit decrease as my loan balance decreases?
- What are the limits and exclusions on the payment of benefits?
- What is the process for canceling the policy?
If the costs or terms of a creditor insurance policy seem unfavorable, you may consider purchasing a life insurance policy to cover your outstanding debts. Life insurance is often a less expensive option that provides a generous payout to your beneficiaries to cover debts and other expenses. However, if you’re unable to qualify for life insurance due to health conditions or other factors, you may choose to purchase creditor insurance to obtain peace of mind for your debt repayment obligations.
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