Should I get personal loan protection insurance in Australia?

If you’re planning on buying a car, renovating your home or going on a vacation, you might have considered getting a personal loan to take care of your expenses. While it can be a great way to meet your short-term financial goals, it comes with several add-on fees and strict payment rules. Missing even one repayment means you might end up paying more in the long run and it could affect your credit rating too.

Sometimes events beyond your control might prevent you from meeting your personal loan obligations. But with personal loan protection insurance, you can protect yourself. Read on to know more about how you can benefit from personal loan protection insurance.

What is personal loan protection insurance?

Unexpected events, such as being unable to work because of an injury or illness, can make fulfilling your loan obligations a challenge, but personal loan protection insurance can provide cover. You can purchase this optional insurance either at the time of applying for a personal loan or after the payment commences.

The actual coverage that you’ll get depends on the policy that you select as well as your personal circumstances. Typically, personal loan protection insurance would cover you for: 

1. Losing your job

If you lose your job suddenly, you might be able to claim for support on your loan repayments. Ask your provider for coverage details and check if there are any conditions for seasonal or contract work. This insurance will not cover you if you resign or have accepted voluntary redundancy.

2. Critical illness or accidental injury

If you fall sick or are injured, leaving you unable to work, you may be able to claim financial assistance to meet your loan obligations. Depending on your policy, your claim may cover you until your loan is paid off, for a defined period, or until you’re back at work. There could be a waiting period from the time of illness or injury to when you can claim, or there could be exclusions, especially around pre-existing conditions. Be sure to read the policy document carefully at the time of getting the policy.

3. Loss of life

Check if your policy will cover the balance of your loan if you pass away suddenly. Read the policy document to be aware of exclusions around pre-existing conditions, suicide, as well as the maximum payout possible.

What is not covered by personal loan protection insurance?

Every policy is different and will have a different set of guidelines. However, it is prudent to check beforehand and be aware of potential exclusions at the time of purchasing the policy. Some typical exclusions are:

• If sickness or injury occurs within a certain amount of days of your policy commencing
• Any pre-existing medical conditions that leave you unfit for work
• Seasonal employment or fixed-term contract
• Quitting your job, retiring or agreeing to voluntary redundancy
• Working less than a fixed set of hours per week when your policy commences
• Pregnancy and childbirth
• Self-inflicted injury or suicide
• War-related claims

How much will personal loan protection insurance cost you?

Premiums for personal loan protection insurance vary from provider to provider and get calculated based on several factors, such as:

• Type of cover and features: You can choose between cover for life, accident and sickness, or involuntary unemployment, and each of these options or combinations will come at different costs.
• Your age: Your age at the time of taking out the policy might also be considered when calculating your premium.
• Your loan amount and term: Your premium will be calculated depending on the size and term of your loan.
• Monthly repayment amount: Your monthly repayments will also impact the total premium that you pay.
• Single or joint policy: If your provider has the option, you could choose to get a single or a joint policy, and the premium could change accordingly.

What should you keep in mind when selecting personal loan protection insurance?

It is important to choose the right personal loan protection insurance depending on your exact needs. As you shop around for the policy that fits your requirements, keep the following points in mind:

1. See that the personal loan protection insurance suits your needs

Does the premium you’ll pay for this insurance offer you value for money? Check whether the payout will be paid to you or directly to the credit or loan provider. Some payments are also made in instalments, which could stop after a period. Then you will need to manage repayments after that. Also, the payout amount could be calculated as per the amount you owe at the time of the insured event, and not when you lodge the claim. Any extra amount added to the loan in the interim may not be covered.

2. Pre-existing conditions may be excluded

Check for exclusions of any pre-existing condition that you might have that could leave you unfit for work. In that case, you’ll not be able to make a claim.

3. Your existing coverage

You might already have similar coverage elsewhere, such as income protection insurance, and this insurance may cover you for your loan repayments. If you have life insurance, you may be covered for your loan balance if you pass away.

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