What is credit insurance?

Credit insurance has several different meanings. Business owners can buy business or trade credit insurance to insure the lines of credit that they extend from their business. This credit insurance protects business owners from debtors who default on their payments or become insolvent through bankruptcy. Policies may be purchased for both domestic and export credit insurance. Individuals can also buy credit insurance policies, called consumer credit insurance.

Consumer Credit Insurance

Consumer credit insurance can be used to ensure that individual lines of credit are paid upon the death, unemployment, or disability of the individual. Consumer credit insurance can also be used to protect the personal property attached to the line of credit, in case it is destroyed by theft, accident, or natural disaster. Lenders of credit often offer consumer credit insurance to an individual when they take out a line of credit with the lender. 

Consumer credit insurance can be purchased to insure credit cards, mortgages, as well as a car or personal loan. This is beneficial for both the individual who purchases the credit insurance as well as the lender of the credit. The individual will not have to worry about how they will make their payment in the event of an emergency, and the lender is reassured that they will receive payments on their line of credit, no matter what. 

Credit Insurance Rules and Protections

It is important to note that no matter what type of credit insurance you buy, you may only insure current debt. That is, a credit insurance company will generally not insure debt that has already entered into collections. Further, as with any insurance, the individual or business should always weigh the risk/benefit ratio of purchasing the credit insurance. If a business extends a large amount of credit to its consumers or clients, then it may be worth insuring the risk of nonpayment or bankruptcy.

If the individual has a high amount of debt, it may be worth it to take the extra precautions necessary, so that his or her mortgage is paid and credit is not ruined in the event of unemployment or disability. Further, in the event of the individual’s death, credit insurance will protect the individual’s heirs from having to absorb her debts. However, there are other ways to protect yourself and your heirs from an unexpected event. Life insurance and disability insurance are other options. Sometimes these types of insurance can be more cost efficient than the credit insurance offered to you by your lender. 

Credit Insurance Offers

While many lenders will offer credit insurance along with a line of credit (some jurisdictions even require them to), you do not have to agree to the offer, and a lender will generally not deny someone a line of credit because they refuse to buy credit insurance. Further, the Federal Trade Commission, the nation’s consumer protection agency, prohibits lenders from inserting credit insurance into the loan without the consumer’s knowledge. The bottom line is that you should talk to your lender, and explore your other options before you decide if credit insurance is right for your personal or business finances.