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When you take out a loan, it is likely that you will be offered insurance to protect your payments should you be unable to keep up with them due to illness or unemployment. However, many of the insurance policies on offer cover you for very little and are extremely expensive. If you want to find out what you should be paying for insurance and what to avoid then this article can help you to decide.
What is insurance?
Loan insurance is often known as payment protection insurance or PPI. This type of insurance covers you if you cannot make your payments because of an accident, illness or involuntary unemployment.
How much does it cost?
The price of insurance can vary greatly, but is usually added as an extra to your payments each month. Although the payment figure might look small, if you add it to the total amount and then add interest the number can seem much more.
Hidden costs
Although a might seem cheap, when payment protection is added the price can increase significantly. For instance, the amount you pay back on a £5000 over 5 years can increase by over £1,500 when insurance is added. Often, insurance is added without you knowing about it, which means you are paying for something you didn't even ask for.
The benefits
Despite its high cost, there are some benefits to insurance. It can give you the peace of mind that if something should happen to you then your payments are covered for up to a year. This means that you won't be in financial difficulty or risk default if you are ill or injured. If this sort of security is important to you then insurance is probably a good idea.
Lack of cover
Although it can give you peace of mind that you will be covered, insurance has extremely limited coverage. For example, if you are self employed it is unlikely that the unemployment clauses will cover you unless your business has ceased trading. Before getting any insurance you should check that you are covered for the things that are important to you, otherwise the policy is not worthwhile.
Alternatives
There are some alternatives to insurance that are usually cheaper. Firstly, you can usually get the same sort of insurance cover independently from your provider. The price of this insurance is usually much lower than the price offered by your insurance company. Also, some of the clauses of the insurance may already be covered under other insurance policies that you have. Loan insurance can be worthwhile, but unless you are covered and can get the insurance for a good price then it is usually not worth having. However, if you shop around and know exactly what you need to be covered for, you can find insurance that will cover you in the event that you cannot keep up with your repayments.
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