Have you heard of credit insurance but aren’t sure what it means? Bankrate explains.
Credit insurance is an insurance policy that pays off an outstanding debt in the event of the policy holder’s death, disability, or termination of employment. When a company obtains credit insurance — called trade credit insurance — it provides protection against customer insolvency.
There are a variety of credit insurance policies that pay off debts should circumstances arise that prevent the policy holder from paying off the insured debt:
The client is usually charged a monthly premium calculated according to the insured amount. As the outstanding balance or debt decreases, the premium is also reduced until both amounts are zero. Single-premium options, on the other hand, require a lump sum paid upfront to fund the policy.
Premiums are determined by regulations issued by trade associations and insurers. For example, an insurance company may offer a monthly premium of 60 cents per $100 per year. If you have $8,000 of credit card debt to insure if you are injured and unable to work, your premium would be $48 per year.
By making repayments, if your debt is reduced to $5,000, the premium on the insurance decreases to $30. The risk to the insurer and the client’s ability to make repayments on existing debt play an important role in determining the cost of the policy.
Find out how to reduce credit card debt for a lower monthly credit insurance premium.
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