A Look at Credit Insurance

Alexskopje / Dreamstime
min read
Updated: 13 June 2023
Written by
Insuranceopedia Staff
On this page Open

Key Takeaways

  • Credit insurance protects against defaulting on loan payments.

Credit insurance is a risk management method as well as an insurance policy that pays off a policyholder's debt if they pass away, go into bankruptcy, or become disabled. It can also cover payments in case of unemployment or even insolvency. Lenders may require you to purchase it as part of a loan agreement. It is, however, very important to understand the different types available and the exact details of a policy before purchasing one.

Mortgage Protection Insurance

This is a policy that pays off your mortgage loan payments in case an event that prevents you from being able to pay occurs, such as disability, unemployment, or death. The amount of coverage depends on the exact policy and the insured events. In case of disability or unemployment, the payment depends on your occupation and ends after a certain period. As for death, the insurance company directly sends a check to the mortgage company.

You may not, however, need mortgage protection insurance. Whether you do usually depends on your financial situation and your health (learn the Top Reasons to Forgo Mortgage Protection Life Insurance).

Line of Credit Protection

A bank or other financial institution may offer line of credit protection to an individual or business. It includes, among other things, overdraft protection, a demand loan, a special purpose finance source, special packing credit, a term loan, and a discount.

Line of credit protection ensures that payments continue in the event of death or disability of the policyholder. In case of disability, the policy pays the minimal amount for a period of up to 60 months or until the policyholder finds an alternative form of income to pay the debt. Since it is non-taxable and cannot be reduced as the result of receiving any amount from a public or private source, this type of insurance can be of great help.

Credit Card Protection

This policy is meant to pay off credit card balances owed at the time of the card holder’s death. It also makes the minimal payment in case of disability or being laid off, but only for a specified amount of time. These policies, however, have a number of variations in the details and also have waiting periods and deductibles that can prevent an individual from benefiting from the policy.

Keep in mind that signing up for a credit card protection policy is very easy but cancelling it is very complicated. It is not that essential because there is a high probability that another policy already provides similar coverage. There are also cheaper and more flexible policies that cater to the problems that may come with the death or disability of a credit card holder. In addition, the heavy burden of proof makes collecting claims rather difficult.

Loan Life and Disability Protection

This is a type of credit insurance that can financially assist you and your family in case you are not able to continue paying an outstanding loan. This could be due to a disability, illness, or even an injury. You also definitely do not want to leave your dependents unprotected after you pass away and paying for a loan you have taken out. Loan life and disability protection can cover your monthly loan payments as well as any outstanding balances you may have at the time of your passing. Moreover, some of these policies cover not only the borrower but also the co-borrower.

Business Loan Protection

This type of credit insurance assists businesses pay their outstanding loans, commercial mortgages, and overdraft in case the main owner or operator of the business passes away or is diagnosed with a particular critical illness. It is also a type of life insurance that pays a certain sum in the event of the insured's death to help pay off an outstanding debt. The death of the owner or operator can lead to a host of issues, and this is where the business loan protection comes in handy, especially if the business owner had invested their personal assets as security for the loan.


Credit insurance comes in many forms, but it typically helps the policyholder pay off some type of loan and thereby protect their credit score (find out how Your Credit Score and Your Insurance Premium are connected). It also offers peace of mind to the insured and any family members who would have to settle any outstanding loans in case of the policyholder's death. It may make sense, then, for some consumers to invest in certain types of credit insurance. But keep in mind that other policies, such as health, disability, or life insurance policies, may offer more coverage for the money (learn Why You Need Disability Insurance).

Related Reading

Go back to top