What Is Credit Disability Insurance?

A disabled woman is sitting in her wheelchair.
A disabled woman is sitting in her wheelchair. (Image: ERproductions Ltd/Blend Images/Getty Images)

Credit disability insurance alleviates your obligation to make loan payments if you become disabled and can't work. If you purchase this policy, the insurance company will make your payments on your behalf. Many details go into each policy. Make sure you read your documents carefully. Note that this insurance differs from involuntary unemployment insurance, the protection plan that makes your payments if you're laid off.

Understanding Credit Disability

The cost of credit disability insurance depends on the amount of the loan and policy guidelines. As a general rule, a $15,000 car loan financed for four years at an interest rate of 9 percent will yield a cost of about $453 for the policy as of publication. This covers the principle and interest. However, purchasing a policy doesn't guarantee the insurance company will pay all claims. Some insurance companies follow the "6 x 6" rule that classifies your disability as a preexisting condition. If you suffered with a disability less than six months prior to your loan acquisition, and then filed a claim less than six months afterward, the insurance company can deny your claim. Keep in mind that credit disability policy might not last for the life of the loan, especially for long-term loans such as mortgages. Credit disability insurance is typically written for no more than 60 months. Loan payments due after the policy expires are not covered.

Think Carefully

Before signing up for a credit disability insurance plan, inquire about any waiting periods before the coverage kicks in as well as any excluded conditions. Find out the full cost of the insurance, including finance charges should those charges roll up into the loan amount. Know your coverage limits as well. Be aware that a lender cannot mandate credit disability insurance. If you've declined the insurance offer and the lender pressures you to buy it, the Federal Trade Commission suggests you find another lender. If the lender denies or threatens to deny your loan, report the company to the FTC or your state's attorney general office.

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