Loan Protection Explained
Loan protection insurance or payment protection insurance (PPI) is designed to help policyholders by providing financial support in time of need. Basically, loan protection is a type of insurance policy that covers you when, in some unfortunate and unforseen cases, you are unable to meet your loan repayments.
People are put in tight financial positions which are out of their control more often than you think. This could be due to falling ill, being injured or losing your job.
Loan Protection gives people comfort in knowing that if they are retrenched, laid off, injured or cannot work due to illness, that their repayments are paid out by this insurance.
There are 3 types of most common loan protection insurance: trauma and death cover, disability cover and involuntary unemployment cover.
Trauma and death cover
Trauma and death cover is a type of Loan Protection Insurance that pays out the remainder of your loan up to $100,000. The payment is triggered in the event of death or if you fall ill with cancer, need a heart bypass, suffer a heart attack and/or major stroke. Be sure to read the product disclosure statement for more information.
This type of Loan Protection Insurance covers your loan repayments to a maximum of $3,000 per month to a maximum of $100,000 throughout the life of the policy. Disability loan insurance covers you if you become totally disabled for longer than a set elimination period (refer to the product disclosure statements for times and limits) and continues during your recovery or until the policy ends.
Involuntary unemployment cover
The era of a “job for life” is over, and in uncertain times, even a steady job is less than secure. If you lose your job and it isn’t your fault, involuntary unemployment cover pays out instalments to a maximum of $4,000 per claim for a maximum of 120 days, after you are made involuntarily unemployed. The maximum amount involuntary unemployment cover will pay out is $10,000. This is subject to an elimination period, which is defined in the product disclosure statement.
Here are some frequently asked questions:
Is Loan Protection Insurance compulsory, like car insurance?
No. Loan Protection is not compulsory to buy. However, it is recommended since it ensures you can meet repayments in the event of sickness, permanent or temporary injury, or involuntary unemployment.
What about a business loan?
Yes, businesses can take out Business Loan Protection Insurance. Over half the loan has to be put toward business development or investment purposes for a business to qualify for this kind of cover.
Are there different levels of cover?
Yes, you can choose combinations of involuntary unemployment, death and trauma or disability cover, or take out a policy that includes all three. For example, you can pair involuntary unemployment with death and trauma or just take out disability cover on its own; the choice is yours.
Remember, always read the product disclosure statement and talk to a financial professional or insurance broker to see if Loan Protection is right for you.
Bill is founder and managing director at Savvy Finance. He has a been working in the vehicle & asset finance business for over 8 years. He also writes articles on car finance, chattel mortgage, insurance, consumer protection and insurance related topics.