Loan Insurance: What Are The Options?

You have probably had the experience of applying for credit for a new car or household appliance, and finding yourself the object of a hard sell to take out loan insurance on top. Or even worse, finding AFTER signing the agreement that loan insurance has been included without a by-your-leave.

Mis-selling of loan insurance is becoming increasingly recognised as a problem. But obviously, there are circumstances where it makes sense to insure yourself against being unable to pay. After all, nobody wants the bailiffs removing their belongings while the neighbours look on.

If you decide you need some form of loan insurance, there are alternatives to taking the policy offered by the lender.

• Shop around for a stand-alone policy from an independent provider. These policies are sometimes called “income protection” policies or “ASU (accident, sickness or unemployment)” policies. They pay out an income that covers your debt replacement requirements – usually for a year, or in some cases two years. Some providers offer a cheaper policy that pays for three or six months. You can choose whether to cover for just accident/sickness, just unemployment, or all three. These policies only allow a single claim – after this the policy is cancelled and you have to apply for a new one. As you can see these policies are much more flexible and allow you to set up cover that meets your individual needs.
• Another option is PHI – permanent health insurance. Confusingly, the name “income protection policy” is also sometimes applied to this type of cover. This type of policy will pay out not just for a year or two years, but for as long as you are incapacitated – up till age 65 or your selected retirement age. There is no limit on the number of claims you can make. Most of these policies only cover accident or sickness, though one or two providers have begun to offer policies that include one year of unemployment cover. Obviously these policies are more expensive. So it is a gamble as to whether you will need them, since conditions you anticipated or already knew about are excluded.

The range of loan insurance policies available can be very confusing, especially as different insurers give them different names. These policies are much better value than the ones you get from lenders, but there are still numerous restrictions and exclusions that vary from policy to policy. So you do need to check that you will be able to claim, especially if you have a pre-existing condition. The best thing is to take advice from an independent broker or provider. That way you can be certain of finding cover that meets your needs.