Is insurance on a loan prudent or pointless?

When you borrow money, whether in the form of homeowner loans or credit cards, you may be offered some type of loan insurance. The purpose of this insurance is to help you with your debts if you are unable to pay them because of job loss, death, disability or some other specific reason.

Before you take on the cost of this type of insurance, however, it is important to consider whether this is a wise choice and a prudent investment or not.

Is Mortgage Insurance a Good Idea?

When you take out homeowner loans, one common product offered is mortgage insurance. This will pay off the mortgage on your home if you die before it is paid off. Many people consider this type of insurance to be a good investment because it will help them to take care of their family after death and to make sure that surviving family members don’t lose their home.

In reality, however, this is essentially just a form of declining-value life insurance and it is often more expensive to purchase this type of insurance just to protect homeowner loans than it would be to purchase a traditional term life policy.

Before you get this insurance, price out what it would cost you to get a traditional term life policy. If it costs less to do so, opt for this instead. You may even be able to afford a policy with a larger death benefit so your family would be able to not only afford to pay off the homeowner loans but also to have some additional money as well.

Is Credit Card Protection Insurance a Good Idea?

Credit card protection insurance is another type of loan insurance that is offered when you borrow money on a credit card. Premiums are typically equal to a percentage of the balance carried on your card.

Credit card protection insurance is often not as good a deal as it seems to be. For one thing, there are many restrictions on when the policy kicks in and you may not be covered for events that you think should be covered. For another, sometimes this type of insurance only lets you skip payments while interest and other charges keep building. This means you may pay for the insurance but not have your debt wiped out.

Before you buy, check these limits and the type of policy in order to make sure that it makes good financial sense to buy it. In many cases, a better option would be to save the extra money that you would have spent on credit card protection insurance and to use it for an emergency fund instead or to purchase a disability insurance policy instead.

These options would provide you with broader protection than simply loan insurance and serve similar purposes, allowing you to cope with credit card debt if you lost your job or became disabled and unable to work.

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