What is Credit Protection Insurance?
Credit Protection Insurance, also known as Creditor’s Insurance, Creditor’s Group Insurance, or Credit Insurance, is used to pay out a mortgage or loan balance (up to the maximum specified in the certificate of insurance) or to make/postpone debt payments on the customer’s behalf in the event of death, disability, job loss or critical illness. It can be obtained for a variety of debt obligations, including mortgages, consumer loans, lines of credit and credit cards.
How does Credit Protection Insurance Work?
Here are two examples of how Credit Protection Insurance works:
Marie takes out a $500,000 mortgage with a 20-year amortization period to buy a home. She is the main income earner, and does not want to leave her surviving family with any mortgage debt if she dies before the mortgage is fully repaid.
So she purchases Mortgage Life Insurance (which is a form of Credit Protection Insurance), which gives her the comfort of knowing that should she die, the mortgage balance (up to the maximum specified in the certificate of insurance) will be repaid and the surviving members of her family will be able to remain in their home without financial duress.
Alex gets a credit card from his financial institution. He purchases Credit Protection Insurance for this card so that he will have protection against a number of potential risks, such as job loss, disability, accidental death, dismemberment, and critical illness.
In the case of involuntary job loss or disability, Alex’s Credit Protection Insurance will make the minimum monthly payments to the card issuer on his behalf to maintain his good credit rating. In the case of accidental death and dismemberment, or a critical illness, Alex’s Credit Protection Insurance will pay off the outstanding balance on his credit card (within a prescribed range).
Alisha would like to purchase job loss insurance so she can continue to make debt payments and maintain her good credit rating should she involuntarily lose her job. But for individuals, job loss insurance is difficult to find and expensive to purchase.
So Alisha decides to purchase Credit Protection Insurance on her credit card, knowing that job loss insurance is a key component of that coverage. In addition, since this type of insurance is normally sold as a part of a group policy, it is usually less expensive than buying job loss insurance as a separate coverage on its own. With this protection, if Alisha involuntarily loses her job, she can count on her insurance to make the minimum monthly payments on her credit card balance.