Credit insurance is a policy of insurance purchased by a borrower to protect their lender from loss that may result from the borrower’s insolvency, disability, death, or unemployment. When a borrower who has credit insurance becomes insolvent, disabled, or deceased, their credit insurance company pays off their debt in order to protect the borrower’s credit or the borrower’s family from liability.
Credit insurance is typically offered as an extra service by credit card issuers or lenders to individuals who apply for an auto loan, auto equity loan, unsecured installment loan, or subprime credit card. Borrowers purchase this type of insurance to guarantee that the loan they receive will be repaid. Such insurance policies usually include a deductible, by which the insured debtor bears an initial loss of an agreed upon amount before the insurer’s liability attaches. When claims are made under the credit insurance policy, the insurance benefits are paid directly to the lender.
The cost of credit insurance for credit cards is usually tacked onto the debtor’s monthly bill, as a percentage of the card’s unpaid balance. When obtaining a loan, debtors are often charged for credit insurance in a lump sum that is included in the total cost of the loan.
There are five types of credit insurance; four for consumer credit products and the fifth for business. These are: 1) credit life insurance, 2) credit disability insurance, 3) credit unemployment insurance, 4) credit personal property insurance, and 5) trade credit insurance/family leave or leave of absence insurance.
Credit insurance is also referred to as accounts receivable insurance, bad debts insurance, payment protection insurance, or credit protection.
[Last updated in August of 2021 by the Wex Definitions Team]