When you apply for a store card, personal loan or new credit card, you will almost certainly have had this experience. Your attention is drawn to a little box on the form labelled insurance” often with the words strongly recommended” beside it.
What is loan insurance? The idea is to cover you if you find yourself unable to meet the repayments usually because of losing your employment, temporarily or permanently. The policy should make the repayments for a specified period usually 12 months. Loan insurance is often called PPI (payment protection insurance) though strictly speaking they are different. Loan insurance comes from the provider of a specific loan and covers only that loan, whereas PPI can be obtained separately and covers any loan.
How much does loan insurance cost? That partly depends what is covered. There are various things you can cover for:
A good loan insurance policy will give you the choice of how many of these you wish to be covered for. The more of them you are covered for, the higher the premium will be. There is often a 30 or 60 day wait from when the problem starts till when the policy starts paying out, but you should be able to opt for a backdate” to Day 1.
The cost of premiums is usually quoted as so much per 100 of the amount of the loan. Depending on how much cover you have, most loan insurance policies cost about 10-30 per 100 of the loan. As you can see, for a large loan this will be pretty expensive.
Can you cancel a loan insurance policy? Many people ask this question if they feel they have been pushed into taking out loan insurance they don’t really need. The answer is: in theory it should be possible to cancel a policy linked to a specific loan, and still keep the loan. In practice, however, the lenders can make it difficult for you as it isn’t in their interests for you to cancel. For example, they may say that you have to cancel the whole loan and take out a new one and they will probably give you less favourable terms on the second one!
The important thing is, be on your guard when taking out any new loan or credit agreement. Decide in advance what you need, and don’t let yourself be pressured into signing up for anything you don’t really want.