What To Know About Personal Loan Credit Insurance

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The personal loan market has been steadily rebounding since 2021. Around 24.5 million consumers held at least one personal loan at the end of 2024, which is a 4.26 percent year-over-year increase, and a 23.12 percent increase since 2021. That debt amounted to about $251 billion, and about 3.57 percent of those personal loans were in default at 60 days or more past due.

Personal loan protection insurance can be a useful tool to help protect you from defaulting in the event of an emergency, loss of income or unexpected change of circumstances. However, the added security of personal loan insurance can be costly, and in some cases, unnecessary.

What is loan insurance?

Most loan protection insurance policies cover certain events for a short-term period, relieving you from having to make payments for a set period, usually up to 24 months. According to the Federal Trade Commission, there are four types of loan protection insurance, each of which covers different situations.

• Credit life insurance: If you pass away before repaying all of your loans, this policy pays off either some or all of your remaining balance.
• Credit disability insurance: This is sometimes referred to as accident and health insurance, which gives you temporary relief from making payments if you can’t work for health reasons.
• Involuntary unemployment insurance: If you get laid off or lose your job, this policy can cover your loan payments for a while.
• Credit property insurance: When you use personal property as loan collateral, this insurance protects the property itself rather than your loan payments.

How does loan insurance work?

If one of the events outlined in your credit policy takes place, such as death, disability, or involuntary unemployment, a credit insurance policy will typically kick in. The coverage depends on the terms of your policy — your insurance may pay off your loan altogether, pay off part of the loan or temporarily take over loan payments.

The policy payout will be paid directly to the lender or creditor. This is what distinguishes credit insurance from other types of policies, such as life insurance, which makes payments to designated beneficiaries, such as family members or yourself.

While credit insurance protects you from the ill effects of loan default (such as damage to your credit score), it also ensures the lender receives the money it is owed. By paying the lender directly, the insurer knows the funds won’t be spent on another purpose.

How much does loan insurance cost?

Credit insurance is almost always more expensive than other types of insurance, such as term life insurance. The amount you’ll pay depends on factors like loan or credit type, the amount of debt that will be protected and the type of insurance policy and lender you choose.

The U.S. Government Accountability Office found that debt protection insurance fees ranged from $0.85 to $1.35 per month for debt insurance on credit cards. Although it doesn’t look like much, the cost adds up for high-balance loan amounts.

Whether your loan or credit is open (like a credit card) or closed (like an installment loan) can also play a role in the cost of credit insurance. The monthly cost of credit insurance on open accounts fluctuates over time as the balance increases or decreases, while the monthly cost on a closed account remains the same.

Pros and cons of loan protection

While there are some benefits associated with loan insurance, there are also drawbacks to consider when deciding whether it is the right financial move for you.

Pros

• Protects your credit score from the impacts of late payments or defaults
• Saves you money on increased interest rates that result from a default or late payments on your credit profile

Cons

• There may be limitations on how helpful the policy will actually be
• Loan insurance increases the overall cost of your loan

Factors to consider

Before you take the plunge and move forward with personal loan insurance, think about these factors:

• Your budget: Because loan insurance can increase the overall cost of your loan, examine your budget. Based on your loan’s principal balance, calculate how much cost the optional credit insurance will add — your lender should be able to provide an exact cost. Compare this amount against your monthly budget to make sure you can afford it.
• Your reason for wanting it: Loan insurance isn’t required. Ask yourself why it’s useful in your situation. If it’s to safeguard your payments in case of sudden, temporary unemployment, for example, consider whether you have other safety nets in place, like an emergency fund or unemployment benefits to fall back on.
• Your other insurance policies: If you have life insurance, for example, credit insurance may not help you. This is particularly true if your reasoning behind it is to avoid debt after death, which might already be included in your life insurance policy.
• The fine print: Read the fine print of any policy you’re considering so that you know what to expect as you make payments toward your credit insurance coverage. Also, find out what will happen in the event that you default on your loan.

Should you get loan insurance?

Individuals who want to ensure that payments toward a credit account remain in good standing in the event of disability or death might benefit from credit insurance.

In most cases, however, personal loan insurance isn’t worth it. The extra costs can make your loan more expensive and the added cost can increase your risk of default. Also, if you have life or disability insurance, it’s likely more affordable than investing in credit insurance.

Sometimes, however, personal loan insurance may make sense. If you have a loan that you can’t defer, for example, or you’re concerned about debt due to a medical condition or unstable job market, it can be an option.

Bottom line

While taking out loan insurance on a personal loan can help you avoid defaulting in certain situations, it’s not the right move for everyone. It increases the cost of your overall loan, and the policy may only be effective for up to two years. If you can comfortably afford to make payments, it’s better to skip this extra expense and instead focus on ways to pay off your personal loan faster.