Introduction 

Credit insurance coverage is somewhat similar to an insurance policy bought by a borrower. It helps to pay off one or more existing debts in case of the borrower’s death, disability, or in rare cases, unemployment. Credit insurance mostly includes a credit card feature, with the monthly cost charging a low percentage of the card's unpaid balance. 

Credit insurance is used by a lot of people as a financial backup in the event of certain catastrophes. Sometimes, credit insurance policies can be overpriced as compared to the benefits that they offer. They may come loaded with fine print that can make it hard to understand fully. Hence, borrowers must read the fine print carefully before buying credit insurance.

What are the Different Forms of Credit Insurance?

Credit insurance coverage is often classified in five different forms. Four of these are meant for consumer credit products and the fifth type is meant for businesses.

  1. Credit life insurance – This type pays off your credit card balance in the event of your death. This keeps your loved ones from having to pay your outstanding credit card balance out of your estate or worse, out of their pocket.

  2. Credit disability insurance – This credit insurance pays your minimum payment directly to your credit card issuer if you become disabled. You may have to be disabled for a certain amount of time before the insurance pays out. There may be a waiting period before the benefit kicks in. So, you can’t add the insurance policy and make a claim the same day.

  3. Credit unemployment insurance – This insurance pays your minimum payment if you lose your job through no fault of your own. If you quit, for example, the insurance benefit doesn’t kick in. In some cases, you may have to be unemployed for a certain amount of time before the insurance pays your minimum payment.

  4. Credit property insurance – It protects any personal property you’ve used to secure a loan if that property is destroyed or lost in theft, accident, or a natural disaster.

  5. Trade credit insurance – This is a type of insurance that protects businesses that sell goods and services on credit. It protects against the risk of clients who don’t pay because of insolvency and a few other events. Most consumers won’t need this type of insurance.

What is the Claim Process in Credit Insurance?

A lot of private as well as state-run insurance companies offer credit insurance policies in India. While the internal systems and processes may vary for different companies, here are some of the general guidelines related to the claims process or settlement in India:

  • The borrowing business must inform the insurance company about the business loss or damage covered under the policy document. They can do so via different channels such as the toll-free number, sending an e-mail or contacting the nearest branch office of the insurance company. 

  • The policy issuing officer must be informed about the loss or damage in the claim form and submitted for further processing or settlement. In case of any police report, it must be submitted to the insurance company. The process is followed by the insurance company checking all relevant documents like accounts, sales sheets, invoices, balance sheets, or any other document requested by the insurance executive.

  • In some cases, an arbitrator is appointed by the insurance company to calculate the value of loss or damage and suggest the sum assured and other benefits payable to the policyholder based on the individual credit insurance policy document. 

  • Once all legal and internal processes are completed, a Final Report is submitted to the internal panel for the claim amount to be given to the policyholder. The policyholder would have to submit his/her ID proofs, Policy Document, and Bank Details etc. for receiving the compensation arising out of the credit insurance claim.

  • The amount is transferred to the policyholder’s bank account based on the selected mode of payment by the insurance company.

What is the Cost of a Credit Insurance Policy?

Credit Insurance coverage can be bought at different costs depending on multiple factors such as the loan amount or debt amount, type of credit and the type of policy. The premiums can be paid either in a Single payment method or through the Monthly Outstanding Balance method.

  • Monthly Outstanding Balance method- This method is one of the most common options with credit cards, home equity loans and similar other debts. There are two categories under this mode of payment.

    • Open-ended credit (also known as revolving credit) lets you borrow more at any time, up to your specified credit limit. This credit form does not carry any fixed repayment schedule to pay back the balance in full, although there is usually a monthly minimum payment amount. With open-ended credit, the cost of credit insurance may be charged via the monthly premium method. This means that the credit insurance premium each month is calculated every month — either by the average daily balance or the balance at the end of the month. Your policy will specify which calculation method is used. The monthly insurance cost will be part of your minimum monthly payment. This charge should be displayed separately on your loan or credit card statement.

    • Close-ended loans must be repaid over a fixed timeline, and at the end of the term you must pay off the entire balance. Instalment loans, such as most auto and personal loans, that are repaid every month are common examples of close-ended loans. With close-ended loans, the cost of your credit insurance may be included as a monthly premium or single premium option. With a single premium, the insurance cost is set at the beginning of the loan and added to the amount you originally borrow, increasing both the amount borrowed and the amount of interest you’ll pay. If calculated as a monthly premium, then the outstanding balance in the account on the monthly billing date is multiplied by the premium rate.

  • Single Payment method- Under this method, the premium amount is calculated at the time of initiation of the policy and the borrower will be responsible for the entire payment at the time the policy is purchased.

FAQs

  1. What are the main benefits of credit insurance?

Credit insurance protects against unforeseeable bad debts and allows you to grow your business or sustainably continue your activities.

  1. Is credit insurance mandatory for a loan?

Credit insurance is optional. But it always advisable to avail credit insurance with a loan to stay protected against loan liabilities.

  1. How does the policy payout under Credit Life insurance?

In case of the unfortunate death of the insured, the policy pays out the outstanding loan amount to the creditor.

  1. How is Credit Property insurance different from the other types of credit insurance?

Credit property insurance is not directly related to an event affecting the borrower’s ability to repay the debt.

  1. How does this policy help business in improving its financial records or planning?

A credit insurance policy helps by ensuring that cash flow is maintained, profitability is increased, and budgets are protected. It also helps in improving credit decisions through informed decision-making by the policyholder.

End Note

Credit insurance protects most businesses from non-payment of commercial debt. Insurers will assess the borrower’s creditworthiness and financial stability of the insured customers and assign them a specific credit limit, which is the amount indemnified if that insured customer fails to pay.