Most people take out loans, expecting to continue earning money from their jobs to pay for them. However, the unexpected can happen; suddenly, they’re unemployed and have no income. That can be very stressful. Unemployment protection can help.
Unemployment protection insurance can give you peace of mind. It kicks in to make payments on your behalf when you lose your job. It also protects your credit score because, technically, you don’t miss any payments.
However, it may not be cost-effective. When you get unemployment protection insurance on top of your loan, you must pay interest on the premium. That will increase the overall cost of your loan.
Let’s look at unemployment protection in personal loans, how it works, and when it might make sense to get some.
What is unemployment protection in personal loans?
Unemployment protection ensures you continue to make loan payments when you become unemployed. You can buy this policy as an option when you get most types of loans, including personal, auto, and home. Some people call this credit insurance.
These come in the following types:
- Involuntary unemployment insurance
- Credit life insurance
- Credit disability insurance
- Credit property insurance
However, while credit insurance coverage can help you get through cash flow issues, it is not cheap. It is usually more expensive than regular disability or life insurance.
Suppose you already have life insurance or disability insurance of any kind. That coverage likely costs less than unemployment protection insurance.
Additionally, you should know that involuntary unemployment protection is a financial safeguard for job loss beyond your control. The operative word here is involuntary. It only covers your loan payments if you can show that your job loss is not your fault.
Suppose you quit your job because you don’t like your boss. Unemployment protection will not cover that.
In most states, self-employed people, including independent contractors, are not eligible for this coverage. Also, in most cases, you must qualify for state unemployment payments to receive this benefit.
How does unemployment protection in personal loans work?
When you apply for a personal loan, the lender might offer unemployment protection insurance. They might make it sound like you must get it to get a loan, but that is not true. It’s optional, so you can turn it down.
Suppose you agree to include it in your loan agreement. In that case, your lender will typically add the premium to your principal, making it part of your monthly loan payments. The good news is you can file an unemployment protection claim if you lose your job, provided it’s not your fault. It could be a strike, layoffs, or other things beyond your control. Your lender can help you file the claim paperwork, so finding out what services they offer makes sense.
Generally, unemployment protection coverage must be in effect at least 60 days before you lose employment. It also specifies the number of payments the insurer will pay on your behalf, anywhere from a few months to five years. As you can imagine, the coverage length will directly affect the premiums.
The idea behind the limit is most people will find another job within the covered period. When purchasing unemployment protection, consider if the coverage is enough for your needs.
How much does unemployment protection cost?
It depends on your circumstances. Factors affecting insurance premiums include where you live and the coverage you want. Poor credit scores may also come into play. However, unemployment protection insurance typically costs more than disability or life insurance.
For example, suppose you are a 30-year-old in good health and get a personal loan for $50,000. Your lender’s annual premium for unemployment protection insurance may be about $370. You can get disability insurance for as little as $83 if you make $100,000 a year. Of course, they don’t cover the same thing, but it illustrates how expensive unemployment protection is.
Suppose you think you need unemployment protection insurance. Consider shopping around. Some insurers offer this type of insurance at discounted rates, so you don’t have to get it from your lender. You can also buy it later, saving you hundreds of dollars.
Do I need unemployment protection in personal loans?
The short answer is rarely. Because it adds extra costs to your loan, it may make your loan less affordable. Ironically, that puts you at greater risk of default.
Some lenders make unemployment protection insurance as part of their loan packages. However, they can’t make it a condition of your loan or add it without your consent. They must disclose it so you can decide whether to get it.
Suppose the lender adds unemployment protection insurance anyway without your consent or pressures you to get it. You can complain to their state insurance commissioner, attorney general, or FTC.
Before considering credit insurance, ask about hardship programs the lender might offer if you lose your job or can’t continue making your scheduled payments. Debt forgiveness or debt settlement may also be options.
Depending on your situation, though, unemployment protection might make sense. Suppose you’re a high earner with more income to lose or have a larger loan and are worried about the effects of default. Unemployment protection could provide you some peace of mind.
However, other ways exist to protect your finances without getting unemployment protection insurance for a personal loan.
For example, you can save for it in an emergency fund in case of job loss. Suppose most of your debt is to credit card companies. You can consolidate them into one loan. You can also turn to other resources, such as government unemployment benefits, to help you replace income.
Some lenders also offer unemployment protection even without insurance. They allow you to put student or personal loan payments on pause while you look for a new job if you meet specific requirements. Talking to your lender and working out a hardship plan or forbearance during unemployment might also be possible.
Takeaways
Unemployment protection in personal loans can help you overcome a rough patch when you involuntarily lose your job. It will pay your monthly obligations when you cannot. However, it might not be your best option because of the added cost. You might do better to consider alternatives to insurance, like saving up or consolidating your loans. Finding a lender willing to help you in these types of situations is also an excellent idea.
