When you buy a car, a house, or make any major purchase, you may need to apply for a loan. When issuing the loan, the lender may offer or require you to purchase credit insurance as security for the loan.

This article goes over the basics of credit insurance, so you know what you're getting into when you sign for one.

Four Types of Credit Insurance

Credit insurance is a type of policy that covers your loan payments in the event that you cannot pay for one of the reasons specified in your contract, such as unemployment, disability, or death. The premium for one of these policies is based on the loan amount. Typically, it will be a percentage of the outstanding balance or principal amount borrowed.

There are four main types available, but whether they are right for you depends on your specific financial situation.

Credit Life Insurance

Credit life insurance is designed to pay the remaining balance on a credit card or loan should the insured die (find out Who Is a Named Insured).

Before opting for this type of coverage, consider whether an adequate amount of life insurance would better suit your needs, since it can accomplish the same objective while also giving the beneficiary more flexibility in spending the benefits.

Credit Unemployment Insurance

Credit unemployment insurance pays the minimum monthly payment on a loan or credit card in the event that you become unemployed due to no fault of your own.

If you have sizeable savings, high job security, or other similar factors in your favor, this policy may not be worth the cost.

Credit Disability Insurance

Like credit unemployment insurance, credit disability insurance covers the minimum payments on credit cards or loans should you become disabled. If this is a concern due to your line or work or other factors, it may be worth comparing the costs and coverage amounts with other disability insurance policies (find out Why You Need Disability Insurance).

Credit Property Insurance

Credit property insurance insures personal property that you purchased with a loan or credit card, or property you are using as collateral for a consumer loan. If that property is damaged, destroyed, lost, or stolen, this policy assures you and your lender than you can recuperate the property's full value.

Because it typically does not require a deductible, it can be a sensible way to supplement your homeowner's or renter's insurance policies, especially for major appliances or equipment.

Conclusion

Although credit insurance can come in handy as a financial lifesaver and protect your credit rating in case of unfortunate events, it can be very expensive (but see How Your Credit Score Affects Your Insurance Rates to find out about the insurance savings that come with ensuring a good credit rating). In fact, other forms of insurance may be cheaper and more practical. Before you decide on one, make sure you understand all the fine print and details so the costs do not outweigh the potential benefits.