Loan protection insurance
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How to save money on income protection
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Learn how to save money on income protection insurance with our special guide...
What is loan protection insurance?
You may know loan protection insurance by its other, more infamous, name – Payment Protection Insurance. Thanks to all the bad press PPI has received over the past few years, you’d be forgiven for thinking that ALL loan protection insurance is bad.
However that’s doing an injustice not only to genuine loan protection providers, but also to the benefits a good loan protection policy can offer – namely a safety net on our loans, mortgages and/or credit cards should we fall on difficult times and struggle to financially meet the monthly repayments.
A loan protection insurance policy is a safeguard very much worth having in place when you arrange a loan or mortgage or take out a credit or store card, as it can offer several layers of protection in the event of the policyholder ever being unable to keep up the repayments on any of the aforementioned financial undertakings of varying sizes and agreed lifecycles.
Everybody knows what happens should you fall behind on any of these far-reaching fiscal arrangements, starting tamely enough with written warnings and penalty charges incurred, yet often quickly escalating into damaged credit scores and in worst case scenarios, repossession of our homes.
Loan protection insurance shouldn’t however be seen as a magic wand which will instantly cure all the above ills, more a system for working your way through challenging and stressful times if and when they are encountered. Coming into effect should the policyholder lose their employment (and therein, their means of income) or suffer from unforeseen ill health, the terms and conditions surrounding loan protection insurance are widely acknowledged as being very strict and well enforced, not to mentioned peppered with exclusions which you must be privy to before putting pen to paper and ratifying any policy drafts.
Do I need loan protection insurance?
Yes. Not in the eyes of the law you understand, just yes as in the pros far outweigh any cons. That’s because a loan protection insurance policy could well represent your only financial lifeline if you suddenly find yourself without a regular means in which to repay any existing credit or store cards, a loan or scariest of all, a mortgage. This is due in the main to it paying out a regular sum of money on the policyholder’s behalf to cover a large percentage of these fiscal commitments for a pre-determined period of time; usually 12 – 24 months or until such time as you’re fit to return to work.
This is usually a tax-free monthly payment in the region of £1,500 or on average 65% of your gross monthly salary; whichever is the lesser. Of course – and by way of a means test – if you’re financial secure, have already paid off your mortgage and don’t have any outstanding debt to speak of, then fair enough, a loan protection insurance policy will be of little interest to you. Yet to the tens of thousands of UK residents who often struggle to make ends meet at the best of times, ensuring that you have a loan protection insurance policy in place is of immeasurable importance.
Before you sign up to anything though, check first that you’re eligible – those disqualified from the outset routinely include the unemployed, part-time or temporary workers, retired and self-employed, while claims made on the grounds of stress, bad backs and previously undeclared and pre-existing medical conditions will also fall on deaf ears – and then seek to ascertain if your present employer offers a redundancy or extended sick pay provision which would alleviate a percentage of the financial hardship should you lose your ability or means to maintain your employment status quo.
Also worth researching which specific illness are excluded, as many different insurers cite alternative medical conditions. Again, and something else to be aware of from the beginning, is that the loan protection insurance claim money doesn’t kick-in with immediate effect, generally not paying out for the first 3 months, during which time you still have to foot the repayments by your own means.
How much does loan protection insurance cost?
Firstly, where possible look to avoid accepting loan protection insurance plans from the mortgage or loan provider who will work hard to convince you to agree to their particular packages while you’re crossing the ‘T’s’ and dotting the ‘I’s’ on said agreements. Independent loan protection insurance companies tend to offer the best rates and deals, but even with them it pays – as always – to shop around and never settle for the first policy you try to get sold.
Although in some cases the loan provider won’t ratify the loan agreement unless the policyholder takes out their loan protection insurance policy, which whilst unfair, is legal (as long as it is fully explained to you prior to you signing up). In addition to this, a dedicated stand-alone loan protection insurance policy is better placed by its very nature to account for all of your outstanding debts at the time it’s called upon, as opposed to one individual credit agreement.
Monthly premiums are subject to, and worked out by, differentials such as how long the policyholder chooses to wait before their policy starts to pay out, as well as the maximum number of payments you are able to claim. Wirth regards to the first statement, the longer you stretch the period between making a claim on your loan protection insurance policy and releasing the funds the cheaper your monthly premiums will be on the actual insurance product; which might make sense but only if you are in a position to cover those intervening payments on a mortgage/loan/etc… or risk bad credit and worse.
To help with choosing which insurance provider to go with, it’s not unheard of to first ask the lender to afford you quotes for the loan both with and without the loan protection insurance in place to ascertain precisely how much they’re looking to charge for the extra insurance product. It certainly doesn’t harm, and if it doesn’t make for good reading you then at least have a worst case scenario barometer in which to apply to future quotes from independent insurance sources.
Despite being offered the choice to pay loan protection insurance policies up front and in the one hit, most people aren’t in a position to do this and instead elect to pay monthly. Which makes greater financial sense on average as this spreads the price equally over a passage of time and doesn’t include any hidden extras which might be requested were you to settle it from the outset. Having said that, it’s crucial that you check with the insurer that they don’t have the right to increase the monthly premium at their discretion, or indeed reduce the level of cover applied to your loan protection insurance policy. There are instances (and packages) which give the insurer the right to do this if they give you sufficient notice of their intentions.
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