Credit disability insurance is offered by many banks, finance companies, credit card issuers and other lenders, the New York State Insurance Department explains. Your creditor may offer a policy when you take out a loan or open a new revolving account, or you may be solicited to buy coverage for an existing account. You need to know the basics of such policies before you decide whether you need one.
Definition
Credit disability insurance is a policy that covers your loan or credit card payments under certain circumstances. This insurance covers your monthly loan payment or the minimum payment on the covered credit card account if you become disabled. The funds go directly to the card issuer, bank or loan company. Such policies are also known as accident and health insurance because the covered disability may be caused by an illness or injury. Your premium is either a lump sum for an installment loan or monthly payments based on your balance for revolving accounts such as credit cards.
Timeframe
Credit disability insurance has certain time requirements. Your disability must last a certain number of days, spelled out in the policy, before benefits are paid out. Typical timeframes are 14 days or one month. Some policies make retroactive payments covering back to when your disability started. Others start paying at the end of the waiting period.
Related Policies
Disability policies represent just one type of credit insurance. The New York State Insurance Department advises that you can also insure your accounts against unemployment or death. Unemployment policies cover you if you lose your job involuntarily, by sending your loan payment or minimum credit card payment to your creditors. Typically, there is a 30-day waiting period before benefits start. Credit life insurance pays off the entire owed balance if you die.
Benefits
Insurance provides peace of mind if you worry about health problems impairing your ability to pay your bills. The MyFICO credit score website advises that one-third of your score comes from your loan and credit card payment history. A disability policy protects your credit rating because your payments are still counted as being on-time even though you are not making them yourself.
Drawbacks
Your insurance coverage will not make much of a dent in your owed balance on a credit card, according to the Bankrate website's Debt Adviser columnist, Steve Bucci, because it only pays the minimum and coverage is usually limited to a certain timeframe even if your disability is permanent. The New York State Insurance Department warns that credit disability insurance policies are sometimes more expensive than general disability coverage. Compare the premiums to see if a general policy is more cost-effective. Your coverage may be denied if you are older than 65 or have certain medical conditions.
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