Should You Get Loan Protection Insurance for Your Business?

loan protection, hands protecting a house

If you are a frugal entrepreneur, getting loan protection insurance for your business may seem like an avoidable, added expense. But if you get the right plan, then the real piece of mind it offers may be well worth the money.

Mitigating the Risk of Borrowing Money

You should know that before a bank, credit union or other institution agrees to lend you money to finance your business start up or expansion, its credit officers carefully size up your income statements, savings cushion, past credit history, and a whole host of other factors to determine your statistical risk of defaulting on the loan. This may sound pretty dry, but the banks have been in this business for many years, and these calculations for determining how much of an investment risk you are, are getting more and more sophisticated. Nevertheless, even the most thorough and sophisticated of risk calculations cannot always predict if you will default on your loan and ruin your credit due to some extraordinary catastrophe, such as an unexpected natural disaster or healthcare emergency.

Whenever you borrow money there is always some level of risk that you will not be able to repay the obligation. That level of risk increases in cases where there are known risk factors, such as operating a business in an area that is known for extreme weather conditions, or performing a service that has a high risk for physical injury, or having a family history of debilitating illness, or even operating in an industry with a high business failure rate. But there is a method to mitigate much of this risk. Enter loan protection insurance.

What Is Loan Protection Insurance?

The term loan protection insurance describes a broad category of supplemental, short-term insurance products designed to cover the payments on certain loans in the event of serious injury, job loss or even death. Although they can be taken out at any time and remain in force indefinitely, loan protection policies typically pay out for single periods of 12 to 24 months. Depending on a policy’s terms and considtions, loan protection insurance offers payouts on a monthly basis, either in a lump sum to the policyholder or as direct payments to individual creditors.

Loan Protection Restrictions

If you’re worried about your long-term employment stability or have a chronic health condition that can flare up without warning and render you unfit to work for long stretches, you’d do well to take out a loan protection policy. This type of insurance is not without its drawbacks, however.

Getting Loan Protection Insurance

Most lenders offer to build loan protection policies into major credit facilities, like mortgages, car notes and business loans. Since their premiums are fairly high, these policies are a great way for lenders to pad their bottom lines during lean times. In fact, if you’ve recently taken out a mortgage or purchased a car, there’s a good chance that you already have loan protection insurance.

Unfortunately, you’re paying a big premium for convenience. Instead of bundling your policy into your loan, shop around at independent insurance companies advertising these products. Since their true cost can’t be buried in the fine print of an existing loan, loan protection policies purchased through reputable third-party insurers are more affordable and more likely to pay out than in-house varieties. Also, it’s illegal to condition a loan’s acceptance on the purchase of a protection policy. Don’t let your lender convince you otherwise.

If you’re worried about your future health or job security, loan protection insurance should be part of your financial risk-management strategy. Be smart about it: You’ll save money if you resist the urge to bundle your policy into an existing loan and shop around for the best deal instead.

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