Credit disability insurance is a limited type of disability coverage that pays all or part of your loan payments if you’re out of work. It’s usually offered as an optional add-on when you take out a loan (meaning you don’t have to say yes).
If you can qualify for a regular long-term disability insurance policy, we recommend getting that instead of adding credit disability insurance to your loan. Regular disability insurance offers more protection and you can use the money however you want (including to make your loan payments).
What does credit disability insurance cover?
Credit disability insurance can help cover your loan payments if you can’t work for an extended period of time because of an injury or illness, like:
Injuries from an accident or fall,
Anxiety or depression
Like other types of disability insurance, credit disability insurance doesn’t cover pre-existing conditions. If you make a claim shortly after getting credit disability insurance, the provider may look for evidence that you had a pre-existing condition when you signed up for coverage.
How does credit disability insurance work?
When you apply for a loan or mortgage, your lender — meaning your bank or credit union — may offer you credit disability insurance as an add-on.
What it does: If you’re hurt and can’t work, credit disability insurance will step in and cover your loan payments.
Who it protects: Credit disability insurance doesn’t have beneficiaries like a normal insurance policy does since the benefits go straight to your lender, but coverage is available to single and joint borrowers.
When you can use it: Different policies have different rules, but you may be able to use your credit disability insurance if an illness or injury prevents you from doing your specific job. The coverage may only extend beyond a certain time period if you’re completely unable to work — in any field.
When your coverage starts: You can make a claim any time after the waiting period (that’s a set amount of time between when you get sick or injured and when you’re allowed to file a claim).
How long your coverage lasts: Credit disability insurance doesn’t always last until the loan is fully paid off, many policies only last for 60 months, after which you’re responsible for any remaining loan payments.
Do you have to buy disability insurance on a loan?
No, you’re not required to get credit disability insurance when you take out a loan. If a lender leads you to believe that you do, the Consumer Financial Protection Bureau suggests you contact your state’s attorney general, insurance commissioner’s office, and the Federal Trade Commission.
What is credit insurance?
Credit insurance is a larger category of financial protection that includes credit disability insurance. Other types of credit insurance include:
Credit life insurance: Covers your outstanding loan balance if you die.
Credit involuntary unemployment insurance: Covers your loan payments if you’re fired or laid off (but not if you quit your job).
Credit property insurance: Covers the personal property you used to get a secured loan, like your car or house, if it’s damaged, destroyed, or stolen.
You might be offered one or all of these types of credit insurance together when you sign up for a loan, but they might have different names, so make sure you know what coverage you’re buying before you sign up.
How much is credit disability insurance?
There are a couple of ways to pay credit disability insurance. But unlike with a regular disability insurance policy, you won’t have fixed disability insurance premiums. You might have either:
A lump-sum premium: In this scenario, your lender adds the cost of your credit disability insurance to the balance of your loan, meaning you pay for the whole premium and any interest on your loan.
Changing monthly premiums: Your monthly payment could depend on your loan’s balance. For example, you may owe a certain amount for every hundred dollars of your balance, which could add up depending on how much you owe.
In both cases you could end up paying more than you planned if your balance changes unexpectedly, like if you have to lower your loan payments.
Is credit disability insurance worth it?
For most people, it’s better to have long-term disability insurance instead of credit disability insurance. Here are some reasons why insurance for a car or home loan might not be worth it:
Less coverage: Credit disability insurance is only good for covering your loan payments, but regular disability insurance benefits go straight to you, like a paycheck, and you can use them on whatever you need — including loan payments .
Higher rates: Credit disability insurance may be more expensive than regular disability insurance because you don’t need a medical exam to get coverage, meaning the provider is taking on more risk.
Interest on premiums: The cost of credit disability insurance depends on your loan’s balance and interest. If your balance grows faster than you can pay it down, your premiums will go up too.
Diminishing value: The payoff you’d get from having credit disability insurance goes down as you pay off your loan, but a regular disability policy stays consistent.
The bottom line? Long-term disability insurance is superior protection, so if you qualify for a policy, it’s a better choice than adding credit disability insurance to your loan. If you’re not sure how disability insurance works or if you’re not sure if it’s right for you, Policygenius can help.
It might be worth considering credit disability insurance if your health makes it impossible to get a regular disability or life insurance policy, especially if your family depends on the loan in question.