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What is loan protection insurance?

By Insurance.com Posted : 06/18/2014

Have you ever applied for a loan through your bank or financial institution and been approached with the option of taking out loan protection insurance?

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You might have asked yourself "what is loan protection insurance, and do I need the extra expense?"

Loan protection insurance ensures that your payments will be made regardless of mitigating circumstances. It's most common on auto and personal loans.

The majority of lending institutions requires this type of insurance and it covers your interest, loans and principle for the duration of the loan in case of disability or unemployment. It will also cover contract performance guarantees, salary contract guarantees and the funding of a business loan.

According to Wikipedia this type of insurance is most often offered on auto and personal loans. However, many of these policies, if purchased through the actual lender, have high premiums as well as commissions for the loan officer attached. If you do not want to pay this high cost you can purchase this policy separately from your regular insurance agent.

This form of insurance can be purchased along with any personal disability insurance policy you may already have, or may decide to purchase in the future. The insurance will typically be used to protect a car loan, personal loan, or car finance agreement. The premiums and commissions may be very high so you may want to shop around for the best deal in order to save money. You may also want to consider the idea of purchasing loan insurance as a stand-alone separate policy. These policies are generally available to people between the ages of 18 and 65 who are still actively in the workforce. In the event you become unable to work due to accident, illness, or unemployment the policy will pay a monthly benefit to you for a maximum of 12 or 24 months. These loan insurance plans are considered general insurance policies and they do not accrue any positive cash value.

If you were considering taking out loan protection insurance you would need to first work out how much your loan or credit car repayments would be each month. All providers will allow you to insure up to a certain amount of your payments. The sum that you insure against will be the sum you would receive each month if you were to become incapacitated or unemployed. All loan protection insurance policies begin after you have been unemployed or incapacitated for a certain amount of days. Some will ask that you wait for 30 days before filing a claim and then others will ask that you wait for up to 90 days. Your policy could payout for up to 12 months or as long as 24 months depending on the provider.

It's in your best interest to purchase the most appropriate policy. Buying your policy as a standalone product will insure you get a quality product and give you the opportunity to decide if this coverage is suitable for your personal needs. Purchasing a loan payment protection will also provide you with a sum of money tax-free if you were to find yourself unemployed or suffering from an illness. Working with a specialist in payment protection can help you find the right product for your situation, as well as save money.

There are three common types of payment protection: Income payment protection insurance, mortgage payment protection insurance, and loan payment protection insurance. These protection plans are virtually the same when it comes to coverage. Income protection is a longer-term, higher premium insurance that sometimes pays benefits up to retirement age for some people and will typically cover incapacity only. Mortgage protection is intended to help assist the insured by covering the monthly mortgage obligation. Loan protection is designed to help cover full monthly obligations.

There are other forms of loan protection insurance as well. One of these is call GAP insurance which stands for Guaranteed Asset Protection. GAP insurance covers your car loan in case of an accident. After you first buy a car the value decreases and since the actual value is what the car insurance pays the GAP insurance will cover the difference. GAP insurance is highly recommended for anyone who purchases a new automobile since the cash value decreased the moment that you drive the vehicle off of the lot. However, some insurance companies offer Guaranteed Replacement Cost coverage for new cars, usually with the guideline that the coverage is available for the 12 months or 12,000 miles. If you policy has this additional coverage, there's no need to buy GAP coverage.

Loan protection insurance can be also purchased to pay off a debt in the event of the loan holder's death or if the loan holder becomes disabled. It's call AD&D coverage (Accidental Death & Dismemberment). This type of insurance is useful for anybody in a single income household to make sure that in the event of an unplanned sickness or accident that the property that is collateral for the loan does not become repossessed or foreclosed upon. It is also a good idea for any family that has one working head of household who makes significantly more than the other working family members.

These insurance plans can be a life saver for a very small initial investment. A person has no way of foretelling what the future may hold for their health or employment status and this insurance is a way to insure your family's way of life and stability in an already difficult time. Shop around and compare prices to receive the best product, so that if you're unable to work due to illness, you'll receive replacement of a portion of monthly income or re-payment of financial obligation.

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