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Credit Disability Insurance - Necessary?

Updated on January 17, 2012

The Logic Behind Credit Disability Insurance

People who have been able to get an auto loan despite their bad credit often wonder if they should play it safe and pick up some disability insurance. This thought process makes sense, since people with bad credit tend to not want to have even worse credit.

What is Credit Disability Insurance?

Disability insurance has been designed to make a borrower’s payments in the event that the borrower is not able to make the payment due to becoming disabled or ill. This insurance is also called accident and health insurance or credit disability insurance. Credit card companies also often offer similar policies.

If you are injured and lose your job or a significant portion of your income, it will obviously become very, very difficult to continuing making your monthly auto finance payments. You could sell your vehicle to pay off the loan, but this present two problems:

  1. No Car: OK, so this is plainly obvious. If you sell your vehicle to pay off your loan, you won't have any transportation to get to the grocery, the doctor, or new job interviews.
  2. Negative Equity: These days, we as consumers are all-too-often guilty of "biting off more than we can chew." Nowhere is this more of a problem than car shopping. If you opt to finance a vehicle for 72 months or more, you will be "upside down" on your auto loan for a significant portion of that time. That means if you try to sell your vehicle to pay off your loan, you won't get enough money to do so. That's obviously a very bad position in which to find yourself.

The Pros and Cons

Although the decision as to whether or not one should get this type of insurance is up to the individual, there are some pros and cons to it that we all need to be aware of.

The Advantages:

The biggest positive to purchasing disability insurance is for many the peace of mind that it provides. Also, since this insurance is normally provided by the loan provider, there is usually no separate payment that needs to be made. It is bundled in with the actual loan payment each month, so it is easy to make the insurance payments.

The Disadvantages:

The first negative to this type of payment is that it does create an additional cost. One unusual thing about this cost is that it normally has interest on it too since it is bundled in with the actual loan payment. All too often, this is not made clear to the borrower! You could end up spending a good deal more on such a policy through additional financing fees, and never realize it!

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Video Explanation of Credit Disability Insurance


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