YOU ASK:

What is credit disability insurance?

WE ANSWER:

Credit disability insurance is insurance that pays all or a portion of a debt in case the borrower defaults due to his disability.

When a person is disabled, it will severely hamper his ability to keep a job and find a new one. Credit disability insurance aims to protect the creditor by ensuring that the debt is paid and the creditor's investment (the loan) is safe. It also protects the borrower from getting a bad mark on his credit history.

Credit disability insurance provides for the monthly payments after the waiting period is completed. Usually, a person has to cover the first monthly payment before the insurance will start to kick in and pay for the rest of the monthly payments, subject to the maximum number of payments specified in the policy.

Also, payments will stop even when the payment period is not completed if the insured's condition improves and he has recovered and returned to work. Most of the credit disability insurance policies in the market have payment periods of 12 to 24 months.

Credit disability insurance is usually required by the creditor when someone is applying for a loan, particularly one that is payable by installment. These include loans such as mortgages, car loans and revolving lines of credit. If the policy is bought to cover credit disability insurance to protect a credit card loan, the insurance will only pay for the minimum payment amount per month.

When you are buying credit disability insurance:

  • Understand what the policy covers. You should understand that some policies may not pay your entire loan. Most just pay the monthly payments for a limited number of months.
  • Some credit insurance policies cover the loan in case of death or unemployment.
  • The creditor may recommend an insurance company where you can buy the policy, but you have the option to look for another insurance company in an effort to save on costs.
  • The disability can either occur while at work or outside of it.
  • Credit disability insurance usually doesn't require medical exams, although some questions regarding your health may be asked.
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