Going into debt is a worrisome affair, especially if you’re struggling to make ends meet at the end of the month. But one thing is for sure, the sooner you pay off your loans, the sooner you can relax, maybe treat yourself a little.
But what happens when you simply don’t have the money to make payments? Aggressive budgeting can only help so much, and some people don’t have the possibility of taking on extra jobs. Even with today’s gig economy, some individuals could find it difficult to find another stream of revenue.
One solution would be debt protection insurance, which essentially suspends, defers, or forgives your debt for a while until you can get back on track. Sounds great, right? Well, the truth is that it might not be ideal for everyone. It can be a powerful tool, but it could also cause more trouble than it’s worth.
Here are 6 questions you need to ask before you go ahead with this plan!
1. Is It a Service or a Benefit?
You basically have two options when it comes to debt protection insurance. Such a service is considered a benefit when it is added on to your initial loan, meaning that you have to pay extra for it. You can compare it to a service package when you purchase a new washing machine from the home improvement store. You might not necessarily need it but at least you have the option to add it to your deal.
In other cases, it’s a service that comes with your loan whether you like it or not. It’s part of the package, meaning that sometimes it could be rolled over into a higher interest rate. Think about it this way: if you don’t want to add a debt protection insurance to your plan, you simply won’t be given the loan.
Before you even take a loan it’s important to weigh your options carefully. You can do so by doing a price comparison between rates for a protected loan and rates for a loan (often from a competitor) without protections. Also, make sure you ask whichever financial institution is offering you a protected loan exactly how much you’re paying for just that on a monthly basis.
Which option is safer for your wallet? What fits into your situation?
2. What Are the Qualifications?
You’re going to need to look for a plan that fits your needs. Sure, it’s impossible to predict the future, but you should still carefully study the qualifications for each plan, as they could be vastly different. So just because one place offers one list of qualifications, don’t assume that their competitors will use the same one.
For example, some might include unemployment while others might not. If you found this surprising, that’s exactly the reason you have to sit down and comb through all of them. Just because it might seem obvious to you that a debt protection insurance should cover unemployment doesn’t mean they all will.
Alternatively, you might stop earning an income due to medical issues. As such, some plans might require you to provide a note from your doctor stating that you can’t work. Others might only work once you qualify for Social Security.
It’s also important to remember that some of these policies might sound incredibly confusing and complex. That’s not you! They’re specifically made like that in some cases, so don’t sign anything you’re not 100% clear on because if the worse comes to worst you won’t get any help if your condition or situation doesn’t fit the qualifications.
And don’t feel bad or guilty about asking too many questions. Remember, this is your money and you should be confident in any agreement you make with any financial institution.
3. What Kind of Protection Is Offered?
In broad strokes, there are three types of protection you can choose from.
Deferment puts the loan on hold, meaning that for a period of time it’s as if the loan doesn’t even exist. You don’t have to make any payments and the company won’t charge interest either. When you’re ready to start paying again you start where you left off.
Forbearance means that the company will not inflict penalty charges, and they will not report you to the credit bureaus. No payments will be recorded but you will accumulate compound interest until you’re ready to start paying up again.
Forgiveness, the third most frequent type of insurance means that the plan will pay off some (in some cases all) of the interest and principal as though you’ve sent the money yourself.
A final option works like traditional insurance, meaning that if you qualify for the policy to payout you will receive a lump sum of cash. You can, therefore, use this money to pay off the balance of the protected loan.
Find out how long it will take for the protection insurance to go into effect, how many missed or late payments will go on your credit record, and if the plan will cover a portion or all payments. Some plans will pay for the interest only while others might also tackle your principle. It’s important to find a plan that is advantageous to you and is something you can work with.
4. What Are the Limits of Protection?
It’s important to know that you can’t just hit the breaks on your debt for as long as you want. This is both to protect yourself and the company since, at the end of the day, they’ll definitely want your money back and you in turn can use this incentive to work out a financial plan.
Limits are either total based or time based.
In regards to time-based limitations you will be protected for a certain number of months. In that time you need to figure out how to get back in the game. At the very end, you will be responsible for the loan once more. Total based limitations protect payments until they add up to a specific sum. The coverage ends when that sum is reached.
All in all, some will offer you protection until you’ll be able to pay again or until the insurance reduces the balance to zero. Alternatively, your policy could specify a maximum of how much they’ll pay out.
With this in mind, ask the all-important question. What will happen after these limitations are reached? Will you be responsible for payments from where you left off? What if you still can’t make payments? Will you receive additional help but in a limited way?
5. Do You Have Less-expensive Options?
The very last option to consider in terms of financial matters may be different from person to person. What someone else considers the last resort could be your first option and vice versa.
Some of our readers might find that debt protection insurance is the least ideal option. In that case, before you even start looking into them, ask yourself what else is out there that can help you out in a similar way. More importantly, ask yourself if these options are less expensive.
You could try going for short or long term disability insurance. You could start working on your emergency savings, which should always include enough funds to pay for not only everyday expenses but also any debts you might have.
Some individuals might benefit from a whole life insurance policy with an accumulating cash value that keeps up with the debt you want to protect. Finally, a home equity line of credit might provide you with enough to cover payments for several months.
6. What Commitment Is Required?
One question that simply is not brought up a lot is… can you cancel the policy at will? Maybe so, but you might need to pay a hefty penalty if you do!
In some cases, it simply does not make sense to keep it up. Perhaps when you signed up for it your financial situation wasn’t so great, so it’s natural that you wanted to protect yourself. But in time you may have gotten a promotion, a huge bonus or you may have found a different, better paying job.
Ask the company if you’re required to carry the plan out for the life of the loan. For most people, such a thing might not make any financial sense.
All in all, like we said at the beginning, these types of policies might be great for some people but downright bad for others. By answering these questions one by one you can get a better idea of getting a debt protection insurance is ideal for you.