Is loan protection insurance a good thing?
September 13, 2012 6:42 AM Subscribe
Is credit protection insurance a good idea?
A credit union has approved me for a debt consolidation loan that I am very happy about (it's a 3-year repayment schedule that will cut the interest I've been paying in half). The total amount of the loan is about 1/3 my annual salary.
The advisor I spoke with talked about 'insurance' on the loan as a standard thing -- I think it covers death, disability, critical illness, and job loss, either paying the debt in full or covering payments depending on the specifics. It seemed expensive -- from the numbers she was quoting, it seemed like it was a ~10% premium on the monthly payments.
I've been thinking about it, and it seems like they're trying to get me to pay to cover their risk. I already have life insurance and critical illness insurance. I have no dependents. The job loss thing seems comforting, but it seems like a lot to pay to cover that risk.
So, is this 'credit protection insurance' a good idea, or just taking advantage?
A credit union has approved me for a debt consolidation loan that I am very happy about (it's a 3-year repayment schedule that will cut the interest I've been paying in half). The total amount of the loan is about 1/3 my annual salary.
The advisor I spoke with talked about 'insurance' on the loan as a standard thing -- I think it covers death, disability, critical illness, and job loss, either paying the debt in full or covering payments depending on the specifics. It seemed expensive -- from the numbers she was quoting, it seemed like it was a ~10% premium on the monthly payments.
I've been thinking about it, and it seems like they're trying to get me to pay to cover their risk. I already have life insurance and critical illness insurance. I have no dependents. The job loss thing seems comforting, but it seems like a lot to pay to cover that risk.
So, is this 'credit protection insurance' a good idea, or just taking advantage?
Best answer: For three years? No, probably not.
Unless this is a secured loan, i.e., something backed by collateral like a house or a car, if you get into trouble you can just declare bankruptcy. No need to spend an extra 10% to cover that kind of risk.
posted by valkyryn at 6:49 AM on September 13, 2012
Unless this is a secured loan, i.e., something backed by collateral like a house or a car, if you get into trouble you can just declare bankruptcy. No need to spend an extra 10% to cover that kind of risk.
posted by valkyryn at 6:49 AM on September 13, 2012
No. Never. You are actually paying for insurance for them.
posted by JPD at 6:53 AM on September 13, 2012
posted by JPD at 6:53 AM on September 13, 2012
Best answer: On the other hand, mortgage insurance can be a legitimate part of a larger insurance package. Private long-term disability insurance generally only pays about 60% of your current income. That's not as bad as it sounds, as disability benefits aren't taxed, but you still wind up with less income than when you started. If you're worried about providing for your family, a separate policy which will pay your mortgage in similar circumstances is not necessarily a terrible idea.
But the protection here is supposed to be for you, not for the bank. The question is not whether the bank is going to get stiffed (Screw those guys. Seriously.), it's whether you will be negatively impacted by the inability to pay the loan. If it's a credit card or other unsecured loan, the answer is "No." Just declare bankruptcy and have done with it. But there are kinds of debt that you can't discharge, like student loans, and there are others that you don't want to, like mortgages. If defaulting on those loans would put your family in a tough spot, mortgage insurance is not an inherently bad idea.
But it's probably the kind of thing you should get from your insurance agent, not your bank. The insurance agent will be looking out for your interests--at least a little--but the bank will be looking out for its own interests. Odds are decent that it'll be cheaper if you get mortgage insurance the same place you get your auto, homeowners', life, etc.
All of that being said, this isn't something to spend a ton of money on. Odds are low that you're going to need it, so spending a big chunk of the actual debt service on insurance isn't a good idea. If you can get something for a few hundred bucks a year to cover a significant mortgage payment, yeah, that might be worth looking into. But 10% of the total payments? Don't make me laugh.
posted by valkyryn at 6:58 AM on September 13, 2012
But the protection here is supposed to be for you, not for the bank. The question is not whether the bank is going to get stiffed (Screw those guys. Seriously.), it's whether you will be negatively impacted by the inability to pay the loan. If it's a credit card or other unsecured loan, the answer is "No." Just declare bankruptcy and have done with it. But there are kinds of debt that you can't discharge, like student loans, and there are others that you don't want to, like mortgages. If defaulting on those loans would put your family in a tough spot, mortgage insurance is not an inherently bad idea.
But it's probably the kind of thing you should get from your insurance agent, not your bank. The insurance agent will be looking out for your interests--at least a little--but the bank will be looking out for its own interests. Odds are decent that it'll be cheaper if you get mortgage insurance the same place you get your auto, homeowners', life, etc.
All of that being said, this isn't something to spend a ton of money on. Odds are low that you're going to need it, so spending a big chunk of the actual debt service on insurance isn't a good idea. If you can get something for a few hundred bucks a year to cover a significant mortgage payment, yeah, that might be worth looking into. But 10% of the total payments? Don't make me laugh.
posted by valkyryn at 6:58 AM on September 13, 2012
No. The money is better spent making direct payments on your debt.
posted by Miko at 7:21 AM on September 13, 2012
posted by Miko at 7:21 AM on September 13, 2012
Can you afford the 10%? If so, can you put that 10% into principal payments to pay off your debt even more quickly?
posted by jeffch at 7:41 AM on September 13, 2012
posted by jeffch at 7:41 AM on September 13, 2012
How much term life insurance could you get for that 10%?
Granted, that would only cover you in the event of death - but I've seen several people who have had a tough time collecting on the job loss portion of this type of insurance. There is usually a crap-ton of small print surrounding the non-life portions of the insurance, with the goal of never having to pay off a claim.
Assuming you've got enough life/disability insurance elsewhere, I'd put the money towards paying off the debt faster.
posted by PGWG at 7:51 AM on September 13, 2012
Granted, that would only cover you in the event of death - but I've seen several people who have had a tough time collecting on the job loss portion of this type of insurance. There is usually a crap-ton of small print surrounding the non-life portions of the insurance, with the goal of never having to pay off a claim.
Assuming you've got enough life/disability insurance elsewhere, I'd put the money towards paying off the debt faster.
posted by PGWG at 7:51 AM on September 13, 2012
Best answer: Read the fine print. Often the insurance for job loss only kicks in after virtually impossible standards are met. I used to do customer service for a credit card company and these add-ons were offered by 3rd party vendors. I would not opt for this on an unsecured loan.
posted by Marie Mon Dieu at 7:52 AM on September 13, 2012 [1 favorite]
posted by Marie Mon Dieu at 7:52 AM on September 13, 2012 [1 favorite]
No way in hell. Take that extra cash and stash it in an emergency fund if you do not already have one. If you do, the extra cash will help reduce the balance of the loan.
posted by futureisunwritten at 7:55 AM on September 13, 2012
posted by futureisunwritten at 7:55 AM on September 13, 2012
Hell NO! This is just another tacked on expense. Decline it.
Not as simple - it could be a major benefit to the OP depending on how stable their job is. Having the monthly payments paid for while you're out of a job could be a significant help (all depends on your job). Check the fine print, and consider it.
posted by Kruger5 at 7:56 AM on September 13, 2012
Not as simple - it could be a major benefit to the OP depending on how stable their job is. Having the monthly payments paid for while you're out of a job could be a significant help (all depends on your job). Check the fine print, and consider it.
posted by Kruger5 at 7:56 AM on September 13, 2012
Response by poster: Thanks everyone -- I'm glad to see that my financial instincts are on the right track for once. To clarify, this would be an unsecured loan. I have no dependents, so no family obligations to worry about. I have life insurance through work for 2x my salary.
I currently have no assets :( so my plan is to put the savings from the lower monthly payments into an RRSP retirement account. I will also try to build up an emergency fund.
I think my job is pretty stable, at least as much as anyone can say that these days. The point about the job loss insurance being hard to claim on is a good one!
It feels so good to be getting my finances in shape after years of stress. Thanks for all the advice :)
posted by sevenyearlurk at 8:05 AM on September 13, 2012
I currently have no assets :( so my plan is to put the savings from the lower monthly payments into an RRSP retirement account. I will also try to build up an emergency fund.
I think my job is pretty stable, at least as much as anyone can say that these days. The point about the job loss insurance being hard to claim on is a good one!
It feels so good to be getting my finances in shape after years of stress. Thanks for all the advice :)
posted by sevenyearlurk at 8:05 AM on September 13, 2012
Best answer: If you have no dependents, why do you have life insurance? What are you trying to insure your life against? In addition to the money that would have gone to the loan protection insurance (which is a waste of money, as indicated by other posters), you should consider cancelling your life insurance and putting it towards the debt consolidation loan.
Another reason not to do the loan protection insurance is because you have no assets. Because you have no assets, there's nothing for a creditor to go after should you need to default on the loan due to losing your job. If you have no assets and no income, you are what is sometimes referred to as judgement-proof. I'm not saying this is a good idea (for one thing, it'd destroy your credit rating), but there's no reason to insure against a cost (having to pay your assets to a creditor) that isn't actually possible for you to do.
posted by saeculorum at 8:23 AM on September 13, 2012 [1 favorite]
Another reason not to do the loan protection insurance is because you have no assets. Because you have no assets, there's nothing for a creditor to go after should you need to default on the loan due to losing your job. If you have no assets and no income, you are what is sometimes referred to as judgement-proof. I'm not saying this is a good idea (for one thing, it'd destroy your credit rating), but there's no reason to insure against a cost (having to pay your assets to a creditor) that isn't actually possible for you to do.
posted by saeculorum at 8:23 AM on September 13, 2012 [1 favorite]
I have had work-based life insurance that was either totally free to me or something like $0.75/paycheck. I'm guessing that's what's going on here.
posted by restless_nomad at 8:32 AM on September 13, 2012
posted by restless_nomad at 8:32 AM on September 13, 2012
Response by poster: The life insurance is part of my overall benefits package (I also have short- and long-term disability coverage). I don't think it's something I could opt out of, and in any case I would like to be able to leave a little something to cover funeral costs and give to my nieces when I go. But thanks for raising the point -- that's something I hadn't considered before.
posted by sevenyearlurk at 8:41 AM on September 13, 2012
posted by sevenyearlurk at 8:41 AM on September 13, 2012
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This is just another tacked on expense. Decline it. Check the box and initial.
posted by Ruthless Bunny at 6:46 AM on September 13, 2012 [1 favorite]