If you’ve just taken out a loan, or are in the process of borrowing money or signing up for a credit card, lender may offer credit insurance. The policies promise to pay loan if insured die, go on disability or lose job.
Credit insurance policy is directly connected to a loan, credit card, retail purchase that is financed, or other debt. This insurance policy provides all or a portion (i.e. monthly payment) of the overdue debt if an event that is named in the policy occurs (i.e. death, disability or involuntary unemployment of the insured). The insurance company usually pays the loan amount directly to the creditor or lender.
Why might you need credit insurance?
If you’re like many people, you cannot make major purchases (a car, truck, boat, appliances, furniture, etc.) without a loan. Selling loan can be through a product sales company or financial organizations, such as a bank or leasing company.
When you apply for this type of loan, the lender can buy you an insurance policy that protects the lender’s investment.
When you apply for this type of loan, the borrower may want you to purchase an insurance policy that secure the lender’s investment.
There may be good reasons for buying or not buying a policy — for example, you might decide not to buy if you already have enough life insurance — but the choice is yours.
Insurance that covers such a loan is known as credit life and credit disability. Some policies cover just life, some cover disabilities only, and others cover both.
Credit disabilities are often called credit accident and health insurance.
Types of Credit Insurance
- Credit Life Insurance :This policy will pay off a specific loan or a portion of the loan, if the insured dies during the term of coverage.A type of insurance that would pay the balance of your mortgage if you were to die before the mortgage was paid off. Sometimes this type of policy offers a disability clause in addition to a death clause, allowing for payment of the mortgage if you were to become permanently disabled.
- Credit disability (credit accident and health ) insurance :If the insured becomes disabled, as clarify by the policy, this coverage makes the monthly minimum loan payments for a limited time period. The policy may require that insured be working a certain number of hours a week before the disability. Insured must be disabled for a certain number of days before the credit insurance will kick in, typically 14 to 30 days.
- Credit involuntary unemployment insurance :If you become unemployed because of a lay-off or strike, this insurance makes the minimum loan payment for a limited time period. The policy may need that you be serving a certain number of hours a week before the unemployed. You must be jobless for a certain number of days, typically 30, before a benefit is paid.
- Credit property insurance :Credit property insurance secure any own property you’ve used to protect a loan if that assets is damage,destroyed or lost in theft, accident, or a natural disaster. This insurance is unnecessary if you have homeowners or renters insurance.
- Credit leave of absence insurance :This policy creates a limited number of monthly payments on a specific loan or credit card if you have an without paid family leave from job for specific reasons, including care for a newborn or a seriously ill family member.
- Business or Trade credit insurance :is a type of insurance that secure businesses which sell products and services on credit.
Credit disability insurance
Credit disability is a health insurance policy. It makes payments to your lender if you become sick or disabled and are unable to work. There may be a limit on the number of payments or the total amount the policy will provide.
Credit disability normally is more costly than credit life insurance.
You may be eligible for some type of disability coverage through your employer. Find out if you qualify before buying additional insurance — you may not need it!
Credit life insurance = decreasing term insurance
- Credit life is same to a special type of life insurance called “decreasing term” insurance.
- A credit life policy is made for an amount equal to how much you owe
- As your loan outstanding decreases, so does the face amount of the credit life policy
- If you die before the loan is fully payback, the policy pays the lender an amount equal to what you still loan at that time
- Younger people usually can purchase decreasing term life insurance for much less than a credit life policy costs.
- The decreasing term policy will meet the borrower’s requirement for protection on the loan.
- As you get older, the cost of purchasing regular life insurance rises. But in maximum cases, it is very costly to buy a small credit life policy as a alternative for regular life insurance protection.
Business Credit Insurance
Many businesses consider credit insurance as a luxury and therefore disregard how such insurance can offer invaluable protection – particularly in today’s business environment.
If a business fails to collect money from debtors on time (or at all), the following effects are likely to happen:
a) Problems in cash flow
A business may trace it difficult to pay their own loan, purchase essential materials and even pay staff wages!
A business may have to finance the loss or delay payment of a debt from their own revenue. This may mean a business with a high profit margin may have to increase their turnover remarkably to make up for even the smallest amount of money.
c) Reduced competitiveness
A business suffering from bad loan may have no options but to reduce the amount of credit they offer making them less competitive.
d) Collection & legal costs
If a business decides to take action to recover loan, this can often result in collection fees or solicitor fees. Alternatively, if the business decides to refund the debt themselves, the process can be timely.
Generally, if you offer credit terms to your customers you will increase your sales (the problem is you will also increase your bad debt). Is it an acceptable cost to insure those credit sales? Well, if you maintain the average annual company bad debt of 0.7%, and with the average annual insurance charge of 0.7% of turnover, the answer begins to sound obvious, ‘yes’. Plus you will have the added benefit of extended cover across your debtors as a whole.
You can expect to be paid by the insurer about thirty days after insolvency has been confirmed by the insolvency practitioner (this in practice could add up to 4 – 9 months after invoicing).
Premiums can be paid quarterly, in advance. Remember, if you increase your credit sales you will increase your premium.
A note on export credit insurance:
Many unforeseen and disruptive circumstances can appear in the world today. As we have seen of late, this is not confined to third world countries. Political unrest, war, military coup d’état, fraud, and all the problems any business in the world can suffer makes export sales without credit insurance: business suicide. Many suggest that your initial sales are covered, and evaluate at a later date when you have a high degree of trust.
Types of export credit insurance
There are many types of credit insurance offered today, which are usually further tailored to the specific security needs of the business.
a) Whole turnover cover
This comprehensive policy will cover the entire business. The policy admits the business to offer credit up to a certain amount: anything above this figure must be agreed in advance by the insurance company. The premium paid is based on the revenue of the business.
b) Critical customer cover
This policy permits a business to have insurance cover against a number of named clients (usually up to 10). Such clients may be under threat from inability, have a poor credit rating, or may be key clients. The business will be fully liable for the remaining clients not covered by the insurance. The premium paid is based on the total overdue debts of the named clients.
c) Specific risk cover
This policy admits a business to have insurance against a single client or a large contract. The premium paid is based on the deed value or the revenue of the customer over the policy duration.
d) Export credit insurance
This type of policy can also insure against a number of risks including political issues, currency issues and dis-honoured letters of credit.
Ways to Buy Credit Insurance
There are several ways that you can purchase credit insurance for your business:
Over 85% of credit insurance policies are sold this way. Brokers will offer tailored advice and administrative support and will earn a commission on sales.
b) Direct from insurance companies
Most insurance companies usually employ brokers to sell credit insurance. however, it is still possible to approach a insurance company directly.
c) The Internet
The Internet is becoming increasingly famous to buy such insurance, particularly to small businesses.
What is credit insurance?
Protection for your business against non-payment by a debtor/s where goods or services supplied were not paid for upfront on delivery.
What are the benefits of credit insurance?
This type of policies help when your customer pays late (sometimes referred to as protracted default) or become insolvent. The policy acts like a safety net protecting you from suffering financial loss due to your customer’s failure to pay.
What exactly does the insurance cover?
Normally 90-95% of the insured debts – when the buyer of the goods/services becomes insolvent or does not pay on time.
Can I be specific about what I want to insure?
You can insure individual invoices or specific customers or your whole book of customers. Insuring selected invoices or customers has only recently become available. Instant Invoice Insurance can now be purchased over the internet.