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Do I need insurance for a personal loan?

Do I need insurance for a personal loan?

Taking out a personal loan can be a big commitment, and it may take several years to pay off depending on your loan term. So, you might wonder if it’s necessary to take out insurance to cover yourself in the case of unexpected loss of income.

Consumer credit insurance (CCI) is a type of add-on insurance typically offered by lenders to protect credit borrowers if/when they are faced with an unexpected life event that prevents them from making their repayments – such as an accident, illness, involuntary unemployment, or death.

While it’s never a bad idea to be thinking about how to protect yourself and your finances should something unavoidable occur, when it comes to insurance, it’s always worth considering whether the benefits truly outweigh the cost. 

Sometimes consumers may take out insurance for peace of mind but come to find that there are a substantial number of circumstances in which they aren’t able to make a claim. Unfortunately, it’s often once they are in a position where they need to make a claim that they come to the realisation that they may not be eligible.

In fact, the Australian Securities and Investments Commission’s (ASIC) 2019 review of the sale of CCI by 11 major banks and other lenders found that it is “extremely poor value for money”.

According to the review, across all CCI products sold by lenders, consumers received only 19 cents in claims for every dollar paid in premiums.

Subsequent to these findings, all of the big four banks have ceased their personal loan protection insurance (a CCI product available specifically to personal loan borrowers) offerings for new customers.

There are some finance companies that may still offer some forms of CCI or loan protection insurance, but if you’re still looking for this kind of insurance, be sure to do your due diligence before purchasing a policy.

Questions to ask before taking out an insurance policy

Before taking out any kind of insurance policy, it’s important to have a good understanding of what it covers, so you can make an informed decision of whether or not it’s worth it to you.

Consider asking the insurance provider the following questions about the policy:

  • What does it cover?
  • What are the exclusions?
  • Are there any claim payment caps and/or limits?
  • Am I covered under my current employment contract?
  • What happens if my employment contract changes?
  • What is the total cost of the policy?

What other help is available?

If you find yourself in a position where you are unable to make your loan repayments, and either you don’t have insurance or your insurance policy won’t cover you, remember that help is available.

Consider reaching out to your credit provider, as they may be able to offer financial hardship assistance. 

Additionally, the National Debt Helpline offers free financial counselling that can help you get back on track.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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