If you’ve ever applied for a personal loan, your lender probably offered to sell you credit disability insurance. While it might seem like an unnecessary cost, it can come in handy if you become sick or disabled and lose your income. Most people assume they’ll never be affected by a disability, but in reality, everyone is at risk of becoming disabled.

Data shows that 5% of working Americans are affected by a short-term disability each year, and only 40% have enough savings to cover at least three months of regular expenses.

While not everyone needs credit disability insurance, some people should consider it. This article will explain what it is, what it covers, and who needs it.

What is credit disability insurance?

Credit disability insurance is an optional insurance policy that is often available when you take out a personal loan. If you become disabled, it helps to cover your loan payments while you are out of work and have limited income. If you choose to purchase credit disability insurance, there are several ways you can pay for it.

The cost might be added to the principal of your loan, which is the amount of money you’re borrowing. Paying for credit disability insurance this way can be more expensive because you end up paying interest on the cost of the insurance policy.

Another option is to pay for it in monthly installments over the lifetime of your loan. If you choose to pay monthly, your premium will decrease as you pay off the loan balance. Before you can purchase credit disability insurance, you must also meet certain requirements.

For example, many lenders only offer this type of insurance to borrowers who work more than 25-hours per week and are under the age of 70. Every lending company and/or insurance company has different criteria.

How does credit disability insurance work?

Credit disability insurance can be purchased through your lender when you take out a personal loan. If you become disabled and are unable to work, you can file a claim and ask your insurance company to cover your loan payments. There are several important things to know about it.

First, you can’t get unlimited benefits. Depending on the terms of your insurance policy, your insurance company will cover your loan payments up to a certain dollar value or over a specified period of time.

Also, there might be a waiting period until you can use your coverage. Some insurance companies will only agree to cover your loan payments if you’ve been consistently paying off your loan balance for a certain amount of time, like 90 days.

What disabilities qualify for coverage?

In order to use credit disability insurance, you must have a qualifying disability that prevents you from working in any capacity. Usually, your lender or the insurance carrier will request to see medical proof of a disability from a doctor or your employer.

While every lender has different covered disabilities, here are some of the most common ones:

• Childbirth complications
• Cancer
• Physical injury
• Arthritis
• Heart disease
• Diabetes

Remember that credit disability insurance will only cover your loan payments up to a certain amount or over a fixed period of time. Meaning, if you have an injury or illness that is expected to keep you out of work for six months or longer, it’s possible that your benefits will run out before you return to work.

Pros and cons of credit disability insurance

Credit disability insurance can be a life-saver for many people. However, it also has several downsides. Before you choose to purchase, it’s a good idea to consider the pros and cons to help you make a decision.

Pros

Let’s dive into the pros of having this type of insurance and how you will benefit from it:

Protect your family financially

Data shows that more than half of American adults live paycheck-to-paycheck. And without a steady income, making your loan payments can be challenging, especially if you have other financial obligations. With credit disability insurance, you can continue to financially support your loved ones without assuming more debt.

Peace of mind

If you become disabled, credit disability insurance can offer peace of mind. You don’t have to worry about defaulting on your loan or ruining your credit score if you can’t afford to keep up with the payments. Plus, you can put more money towards medical bills, rather than spending that money on your loan.

Cons

We’ve said it before, and we will say it again there are cons to pretty much anything. Here are a couple of cons to this type of insurance:

Limited coverage

Credit disability insurance will only pay up to a certain dollar value, or a specific number of loan payments. If you are disabled for a long period of time, it’s likely that your benefits will eventually run out. In addition, there’s usually a waiting period before you can use this policy.

Potentially expensive

In terms of cost, it can be pricey, particularly if you add the premium to your loan principal. Remember, if you go that route, you not only pay for the insurance but will also be paying interest on that amount. So make sure you know how much it will cost before you buy it.

Who needs credit disability insurance?

Consider this: More than one in four 20-year-olds today will suffer from a disability at some point before they retire. With that being said, almost everyone can benefit from having credit disability insurance. Regardless of your age, health status, or occupation, major injuries, and serious illnesses can prevent you from working and bringing home a consistent income.

It can be especially helpful if you provide financial support for your family. If you’re unable to work and you’re paying off a personal loan, insurance can cover your loan payments, so you’re not sacrificing your lifestyle or dipping into your savings.

However, it is typically more beneficial if you have a long repayment period, like 60 months. If you are paying off your loan over 24 or 36 months, you could have a smaller chance of becoming disabled during that time. But at the end of the day, you choose the amount of risk you are comfortable taking.

Is credit disability insurance worth it?

Overall, the decision to purchase credit disability insurance is personal. It’s worth it for some people, and not worth it for others. But if you want the added peace of mind, it is certainly something to look into.

You might also be wondering if credit disability insurance is necessary if you have short-term disability insurance through your employer. The answer is—it depends. Short-term disability insurance replaces your income while you are unable to work due to a qualifying disability. You can use the money from disability benefits for any reason, including making loan payments.

However, the combination of short-term disability insurance and credit disability insurance gives you the greatest financial benefit. The income you get through disability insurance doesn’t need to be spent on loan payments if you have credit disability insurance, which ultimately puts more money into your pocket.

Protect your finances with credit disability insurance

The saying goes it’s always better to be safe than sorry. You never know what life may throw your way, so why not protect yourself with the right type of insurance. This can prevent you from defaulting on your loan and ruining your credit too. Just make sure you understand what the policy covers and how much it costs before you buy it.

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