What is Consumer Credit Insurance?

Consumer credit insurance is a type of insurance a consumer may buy to insure against his inability to repay a debt. Unlike other types of insurance, consumer credit insurance doesn’t pay the person who buys it; it primarily benefits the company that has extended credit to the consumer. In the event the consumer fails to repay a loan, pay a credit card bill, or settle some other type of debt, the consumer credit insurance pays the money the consumer owes. A consumer typically buys credit insurance to provide coverage in the event he loses his job, becomes gravely ill, or suffers an injury that leaves him disabled.

When creditors lend money to consumers, they take on risk. In the event that the consumer fails to repay the loan or credit he has received, the creditor suffers a loss. If an individual with consumer credit insurance is unable to pay a debt because of loss of employment, illness, disability, or another insured circumstance, the insurance pays the debt, or a portion of it, and may help keep the consumer out of collections and bankruptcy court. Whether or not consumer credit insurance helps a person avoid collections, however, depends on the type of insurance.

One common type of consumer credit insurance is referred to as mortgage insurance. A consumer purchases this type of insurance to protect the mortgage lender from some of its losses in the event of a default. Though it may seem that this type of insurance doesn’t provide much benefit for a borrower, there is one major advantage of securing this type of insurance: In many cases, a lender may be more willing to grant a mortgage when the borrower will obtain mortgage insurance. Unfortunately, however, mortgage insurance doesn't usually protect a borrower from foreclosure.

In addition to mortgage insurance, there are other types of consumer credit insurance a person may buy. For example, he may purchase insurance for various types of loans, installment payment agreements, or credit card accounts. This type of consumer credit insurance usually pays a lender if the account holder is unable to do so. For example, if a consumer loses his job, becomes disabled, or suffers an illness or injury that renders him unable to work, this type of insurance will typically pay the lender in full or cover the payments the consumer misses. Often, this will help a consumer avoid credit-damaging default and bankruptcy filings.