Loan insurance is a product that is nearly always offered to you when you take out any kind of loan or credit agreement. However, many people have found out that it can be a seriously expensive product that hugely increases the cost of the loan.
First and foremost, you need to consider seriously whether you actually need loan insurance. But if you decide that you do, it’s worth looking at ways of minimising the cost. There’s really no point in paying out more than you have to.
If you are thinking about using the loan insurance offered by the lender, make sure you insist on seeing what the total cost of the loan would be WITHOUT the insurance. The lenders will be reluctant to part with this information, but you have a right to it. This will help you to judge what the true cost of the insurance is.
Rather than using the loan insurance offered by the lender, consider going for a stand-alone PPI (payment protection insurance) policy. These policies usually cost a lot less and apply to any loan or credit agreement, not just one specific one.
Read the small print very carefully to find out what is actually covered. There is no point in insuring for things that don’t apply to you. For instance, if you are self-employed, insurance against redundancy is irrelevant. Insurance against going out of business may be more to the point. Negotiate with the lender for a reduced rate to cover only the factors that apply to you. They are often very anxious for the business and may do a deal.
Check carefully how the lenders set the premiums. If you are taking the lender’s insurance, you may find that they add the cost of the loan insurance to the original loan meaning you pay interest on that in addition to the loan interest! A few lenders simply add the loan insurance premium to the monthly statement. Point this out to your lender and threaten to cancel the deal if they don’t do the same. If they won’t, ask your broker to find you one that will. The loans industry is competitive so you are in a buyer’s market!
There’s no virtue in paying over the odds. It really mounts up over a period of time. It’s worth looking at any way you can reduce the cost.