Loan protection insurance explained
- 17TH JUNE 2007
At one time it was thought that you had to have assets or a very good job in order to get a loan. And whilst that may be true if you want to get a low APR lenders are now much more willing to lend to those not so well off. People who are not so well off are more likely to be looking for a loan and therefore are an easier market to sell to says Simon Burgess, MD of British Insurance.
Lenders appreciate that most people have goals and wants in life and that most people would like to achieve those goals earlier rather than later. Lenders will often provide unsecured loans of up to £15,000 and for those taking out a mortgage then the borrowing ability may be up to five times their salary.
Just simple purchases now often come with built in credit so that we can buy them immediately. For some it is common practice to tie in any reasonably large purchase with some form of credit. But all this borrowing can soon increase the monthly loan repayment figure. That may be fine if you are still employed but what would happen if you lost your job or were unable to work for a few weeks. Health, the ability to work and having a job are not items that are guaranteed.
So if you are made redundant. Loose your job, become ill so that you can not work or have a serious accident then what financial position does that put you in. It is at those times that having to deal with large regular loan repayments may not be easy to meet.
It is to cover some of the risks mentioned above that loan payment protection insurance came into being. Typically these policies provide a monthly benefit which can be paid for up to a maximum of 12 months if due to illness, accident or involuntary unemployment you are unable to work. 12 months may not cover the whole period of the loan but it can go a long way towards helping. Within that 12 month period you may well recover or find another job.
Loan payment protection policies can vary in both price and cover and it is worth shopping around to get the best deal. The person who is arranging the loan or perhaps the lender may offer you a loan payment protection policy. They may be great at loans but that does not mean that they will also be great at loan protection insurance. Shopping around can save you money and if you are forced to borrow then saving money should be important to you. You should not be forced to purchase from the lender and so shopping around should be looked on as a natural approach to buying anything.
When comparisons have been made over the cost of such insurance policies usually the lenders and major banks have not come out so well, whilst specialist internet firms with low overheads have done very well on price.
But you should not just be concerned with price. Also consider the terms and conditions of the cover. For example all the loan protection policies will require you to be off work for a certain period before they start to pay a claim. The better policies use a minimum period of 30 days whilst in some policies this could be set at 60 days.
Also see if the policy will back date the benefit payments. For example a policy has a waiting period of 30 days but will back date benefits to day one. So first you have to be off work consecutively for more than 30 days but once the 31st day is reached you are entitled to receive benefits being paid from day one. If the policy does not back date benefits then your claim will still be eligible for payment on day 31 but you will not get paid for the first 30 days you were off during the minimum exclusion period. That can be important if money is tight.
Every insurance policy has exclusions and loan protection insurance is no exception. What follows are two examples of common exclusions. You are strongly advised to read the policy offered to you to make certain that it will meet your needs.
Loan protection policies will not cover medical problems that already existed when the insurance first started. These are termed as pre-existing conditions. Some policies will reduce this exclusion if you have not suffered in any way from the condition for two years before you were forced to be off work. However chronic conditions are still excluded.
Self employed people need to check what is required for them to claim involuntary unemployment. The policies often require their business to have ceased trading and be in the process of being wound up.
Sometimes the exclusions can make loan protection insurance unsuitable for certain people. However for the majority it can be an economic way to obtain peace of mind.
