Loan protection insurance is taken out with many new policies, but not everybody understands what it does or why it might be necessary. Most if not all insurers will offer some form of loan or payment protection insurance, so it is important for consumers to know exactly what it is, what it does and whether it is right for them.
When a person applies for a new loan, the loan or payment protection insurance component is usually offered somewhere near the terms and conditions. Unfortunately, many people choose to check or uncheck the option for loan protection insurance without reading the small print. Loan protection insurance is simply a premium added to a policy that covers the insured in the event of involuntary unemployment, sickness and even death (after all, nobody wants to leave behind a debt for loved ones.)
The cost of loan protection insurance varies considerably between lenders. In some cases, loan or payment protection insurance can add more than 25 per cent to the basic monthly premium (including interest.) Clearly, few people are likely to want to pay more than they need to for their loan, but many are unsure of the importance of payment protection.
In the event of involuntary unemployment or illness, loan protection insurance is obviously very useful. The terms of most loan protection insurance plans ensure that monthly premiums owed by the insured are paid in the event of certain emergencies for a specified period of time. Undoubtedly, loan protection insurance pays for itself when the insured is forced to miss several repayments after being made unemployed or suffering a serious injury or illness. The sticking point for many people is in deciding whether the risk of having no loan protection insurance - and therefore no cover in the event of an emergency - is one worth taking.
Certainly, loan protection insurance is not for everybody. Self-employed people, for instance, will not usually be able to rely on the same standard of protection as the employed. Equally, loan protection insurance is not a universal get out of jail card. If an applicant who chooses loan protection insurance happens to be employed with a firm facing financial turmoil, for example, he may be unable to rely on the cover if he loses his job and redundancy was deemed to be reasonably foreseeable.
What constitutes `reasonably foreseeable` is often a matter for the lawyers to settle, but it is important for an applicant to read the terms and conditions of a loan to determine precisely what is covered - and, perhaps more importantly, what is not covered - by the insurance. It may be that certain occupations or industries are excluded under the terms of payment protection insurance.
After deciding whether a particular type of loan protection insurance is suitable, an applicant should consider whether the policy represents good value for money. Some providers of payment protection insurance charge too high a percentage of the monthly premium, adding thousands to the total cost of a loan. It may be worth shopping around for the cheapest loan protection insurance premiums. Standalone suppliers of loan protection insurance sometimes offer the most cost-effective options for consumers.
In the UK, banks and other types of lender have been taken to court over the mis-selling of payment protection insurance, which is by no means useful for all applicants. Lenders in the UK must now fully express the terms and conditions of loan protection insurance, ensuring in the process that they do not mis-sell the cover.
In conclusion, loan protection insurance is useful for covering loan repayments during times of emergency, but not types of cover are beneficial to everybody. When considering whether to select loan protection insurance, it is advisable to use a loans calculator to assess all relevant costs.
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