Creditors insurance can protect lenders if borrowers die or become disabled before paying off a loan. It can be mandatory or voluntary and includes life and disability insurance. Group policies are generally less expensive, and declining term life insurance can cover mortgage loans. The proceeds go to the lender, not the insured’s family.
A lender can protect your interest in a loan by using creditors insurance. This will compensate the lender if the borrower dies or becomes disabled before the loan is paid in full. Generally, the borrower pays for these insurance policies. Such policies can be mandatory or voluntary, depending on the type of loan and the requirements of the lender.
Two common examples of creditor insurance are life insurance and disability insurance. Life insurance policies pay a lump sum, or death benefit, if the insured dies. Disability insurance pays a monthly sum if the insured is disabled and unable to work. When the person is able to return to work, disability payments are suspended.
Creditor insurance is generally available as part of a group insurance policy, rather than an individual policy. Group policies are generally less expensive than individual policies. The lender is the owner and beneficiary of the group policy. The borrower is known as the insured.
For example, a bank wants to insure all its mortgage customers. The bank applies for a group creditor insurance policy. The insurance company weighs the risks of the entire group against the price of the policy. Each client pays a fee, called a premium, which will be covered under the policy. As a result, the bank’s customers pay a lower rate than if they each purchased an individual insurance policy.
Declining term life insurance can be used to cover a mortgage loan. As the customer pays off the mortgage each month, the outstanding balance, the insured amount, is reduced. The amount of the death benefit will be reduced to match the remaining balance of the loan. As a result, the premiums can also be reduced each month.
Creditor insurance can also be used to secure credit card balances. These policies are sometimes called credit card protection programs. The customer may choose to purchase life or disability insurance, or both. The cost of the policy varies each month, depending on the balance of the credit card. When the customer has a zero credit card balance, there is no premium due that month.
Banks can also use creditor life insurance policies for business loans. If a bank lends money to a business owner, the bank may require a life or disability insurance policy for the owner. Such policies help ensure that the loan will be repaid. This coverage is especially important if the owner’s job creates the main source of income for your business.
It is important to note that the proceeds, or death benefit, from any creditors insurance policy are paid to the lender, not to the insured’s family. A person would need to purchase separate life or disability insurance policies to protect their family in the event of illness or death. Life and disability policies can be purchased only from a licensed insurance agent.
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