The phrase loan protection insurance may conjure up the spectre of a couple of ‘heavy dudes’ arriving at your front door carrying violin cases and looking to make you an offer you can’t refuse.
In fact, rather than a threat, loan protection insurance offers you the chance to free yourself from worry and avoid potentially crippling debts.
What are these potential debts and crippling costs?
Debt and the modern world
Unless you are very unusual, you probably have debts. This may be for things such as your car, furniture around the house, perhaps that kitchen extension and very probably your mortgage. You may also have one or more credit cards with debit balances.
The philosophy, politics and economics of debt are way beyond the scope of this article and no judgement is made about its respective rights and wrongs.
What is indisputable is that the majority of people manage and service their debts without problem. For many people, a loan or loans represent the only possibility they have to purchase a house, car and perhaps even some of the smaller luxuries in life such as that occasional special holiday.
The sensible and appropriate use of borrowed finance is a part of modern life and for many people this is never a problem.
One thing is clear though. Debts needs to be ‘serviced’ – in other words paid back in line with an agreed schedule. This is usually that monthly repayment that so many of us know so well. To keep to the repayment schedule we all need one thing – regular income.
Debt and changing personal circumstances
If keeping debts under control depends upon your regular income then it goes without saying that losing that regular income can immediately throw things into chaos. Few people are fortunate enough to be able to suffer a loss of income without it having an immediate and potentially catastrophic effect upon their financial position.
This could affect many aspects of your life but understandably what little income you may receive from other sources such as state benefits will be switched to your basic survival expenditure on things such as food, clothing and the utilities such as your power bills and rates.
What you will probably find is that you have precious little money available for meeting your larger debt repayments including perhaps things such as the mortgage and car.
How your circumstances can change
A loss of income may be closer to many of us than we would care to believe. Statistics published in June 2009 showed that in the period January-March 2009 no fewer than 302,000 people were made redundant (source – Office National Statistics).
Although it can’t be said with certainty, it is not unreasonable to suppose that in many individual cases this was completely unexpected and a major shock. Any notion that a job was secure should have been dispelled by events from the 1970s onwards but even so, it is easy to slip into the mentality of “it’ll never happen to me”. Even if it is predicted, unless you have some form of financial contingency plan in place, the financial effects of redundancy can be literally ruinous.
Sadly, it isn’t only redundancy that can rob us of our income. Sometimes our health may give cause for concern and we may lose our job as a result. It’s also possible that an accident may have a similar effect.
Whatever the cause, your life will change. The main question is, will that change be at least partly managed and under your control or will you be entirely at the mercy of the various parties around you?
The effect of a loss of income without a contingency plan
It may not be quite the end of the world, but if you have debts that cannot be serviced because you are without income, then like it or not you are likely to be at the mercy of others.
In essence, if you find yourself in such a situation and without having a financial ‘fallback position’ defined, to avoid financial disaster your only courses of action will be a combination of:
• Hoping you find new income almost immediately
• Relying on friends or family to help
• Spending any savings you have
• Looking for state help
• Hoping your various lenders and other creditors ‘help out’.
The first two may be very optimistic or hostage to fortune and the third a great pity – assuming you have any savings to begin with.
State help may be available but it will certainly be limited. You may be eligible for unemployment benefit and possibly some supplementary social benefits but in total they are unlikely to offer anything other than basic survival or subsistence level income. They are not going to help you meet your mortgage, car and other debt repayments.
It is true that the government may POSSIBLY be able to offer some help with a contribution to a percentage of the interest each month on your mortgage. Unfortunately though, you will still have to find the balance and it is possible that your mortgage lender may not accept interest-only payments.
At the time of writing, there is little or no other government aid available for debts relating to things such as HP, car repayments, credit card bills or bank loans (other than for a mortgage).
This leads into the question of help from your lenders and this is an important subject.
The role of creditors (lenders) in a crisis
The vast majority of organisations that lend money do not exist to serve a social purpose. Quite simply, they exist to make a profit.
As such, their businesses depend upon them lending money and being able to predict with some certainty when they’ll get it back and with what interest attached. For their businesses to survive they must keep a fairly tight control over the repayments of loans.
If individual borrowers get into temporary difficulties, some lenders (though not all) may be able to offer some forms of short-term relief or help to the people concerned. That’s because they are in the business of lending and receiving money rather than the repossession and disposal of assets.
For this reason they do not like taking legal action and trying to get their money or assets back through recoveries and repossessions. It is time consuming and expensive for them to do so and above all, it is poor Public Relations and publicity for them. No finance company wants to make headlines due to the number of cars or houses it has reposed in a given period of this time.
Therefore some, if they can, may be able to offer you interest-only payments on the loan. Far fewer MAY be able to offer very short-term payment holidays or debt re-scheduling.
Although this is an avenue that may be worth exploring as soon as you realise you have lost your income, it can only at best be a very short-term and stop-gap measure. Relying on it as the only way of keeping your house, car and other possessions ‘in place’ may be a very risky strategy indeed.
However much banks and loan companies detest repossessions and legal recovery actions, they detest bad debts and loan write-offs even more; As a result many of your lenders WILL move to recovery and repossession much sooner than you think, even if they have been able to offer some initial help. It doesn’t mean that they’re unsympathetic to your plight, just that they can’t do much about it themselves.
Losing your income – steps
The circumstances of each individual will be different. This article cannot even pretend to offer advice that would be pertinent in detail for you. What it can do is point out certain generalities that you may wish to consider should the worst happen.
• Don’t bury your head in the sand. You may get lucky and find immediate replacement income or win the lottery. However if neither in fact happens, then ignoring the problem won’t help. It won’t go away quickly.
• Notify your lenders quickly. Lenders are far more likely to offer at least some short-term help if they see you have been proactive and have behaved in a responsible adult fashion. If the first sign of your problem is that your payments stop being made, then they are less likely to perceive you as someone they can trust and who is in control of their financial affairs.
• Seek qualified help. Articles are fine but they have their limitations. There are special advisors available in various organisations. Find them through the Internet and contact them for advice.
• Don’t ignore reminder letters or payment threats. Even if you have already contacted them and perhaps agreed some short-term help, some lenders may be obliged to send you out formal letters asking for payment and threatening repossession or recovery. Make sure you respond to these clarifying exactly your position and what you are doing to try and address the problem. Consider sending your letters recorded delivery rather than just ‘phoning-up’ or sending a casual email. This could be important in any future legal action.
The reality is though that if you have lost your income, however much communication and proactive negotiation you engage in, your house and goods could be at risk unless you can start paying off the debts again. In essence, you are not in control of your financial future and need a mixture of luck and extraordinarily co-operative lenders to survive.
There is an alternative – loan protection insurance.
The principles of loan protection insurance
In a sense, the name says it all!
There is a form of insurance policy available that can deal with at least one financial aspect of losing your income – your various loan repayments.
The insurance can be targeted at a loan or loans and will make the monthly payments for you if you are unable to do so yourself because you’ve suffered an involuntary loss of income. This could include any combination of things such as your car, furniture payments or even the mortgage.
This can be a huge lifeline and it could mean that you are able to keep not only the roof over your head but also your car and other possessions around you. That isn’t just a question of life’s luxuries either. If you lose your car you may find it restricts your freedom in job searching and you are unlikely to be able to concentrate your full attention on finding new income if your house and lifestyle is being dismantled around you as your goods are repossessed.
Loan protection insurance – it’s use as a contingency plan
This form of insurance is ideally suited to use as a financial contingency plan – in other words something that would help in a variety of “what if” situations.
To utilise it most effectively, you would need to consider first of all what risks you were exposed to. Redundancy is one obvious example but also there are those risks of accident or injury.
It’s possible that your existing employer offers an exceptionally generous sickness and accident cover scheme as part of their employment benefits and you feel therefore that additional cover is not required. Alternatively, perhaps you are working for a very profitable, successful and expanding company and you feel that your role in it in future is assured. If that’s the case your major concern may be sickness or accident depriving you of your ability to work.
Whatever you decide, you can find a policy that will cover those risks. At that stage, it becomes a question of what benefits you would require should the worst happen and you need to claim.
You can decide what bills you’d like to cover and see what this totals financially speaking. Policies of this nature will often pay out up to a maximum of 1500 pounds per month or 50% of your gross income depending upon which is the lesser. They can often make payments directly to your loan companies meaning you won’t have to get involved in the administration.
These payments will continue until such time as you have found replacement income or to a maximum period of 12 months. There are even some policies around that may offer cover for 24 months.
The benefit of having this insurance in place is that it provides you with a plan to cover that ‘what if’ situation. You could at least know that your bills ‘ a b c and x y z’ would continue to be paid if you had no money coming in.
The conditions
Although insurance companies sometimes get bad press for apparently trying to ‘duck out’ of claims, in reality the vast majority publish very clearly their terms and conditions as well as what a claimant must do to meet the conditions of the policy.
These should always be read carefully before purchasing the loan protection insurance policy. It is not a particularly difficult task and in recent decades the insurance industry has made huge progress in using plain English and de-jargonising it’s policies and other documentation.
In the case of loan protection insurance, the major conditions are usually simple and logical.
1. The insurance will only cover a loss of income arising from involuntary circumstances. Typically this includes redundancy, sickness and accidents.
It is not there to offer you protection against the results of YOUR decisions. So you cannot claim for things such as resignation, some forms of dismissal, normal pregnancy, career breaks, returns to education or voluntary redundancy.
If you opted to include sickness and accident cover, you may find that certain optional medical procedures such as cosmetic surgery would not be covered.
2. If you claim, you will probably be asked to submit evidence that your loss of income was caused by a covered situation. This will usually need to be in the form of a verifiable document from an independent party. Examples may include a medical letter or your ex-employer’s statutory redundancy notice.
3. While you are claiming, you may be asked to produce periodic evidence that you remain unemployed or unable to work. In the case of redundancy, you may have to show evidence that you are actively and enthusiastically seeking alternative employment.
Points 2 and 3 above are not in any way indicating that the insurance company doesn’t trust you personally. This is entirely normal practice and it is aimed at discouraging fraudulent claims that, sadly, are fairly widespread in today’s world.
Getting your insurance in place
Obviously at some stage this is going to involve you in parting with some cash for the loan protection insurance premium but not everyone will be eligible for cover.
There are a few things worth keeping in mind.
• You will need to be in verifiable permanent employment through a recognisable employer. Working casually for a friend or relative will probably not be considered acceptable but you do not have to be working full-time. Some forms of part-time working will be acceptable but it will need to be more than a specified number of hours per week.
• You will probably need to have held the job for at least 6 months. The insurance company may also expect to see some evidence of a clear work history.
• You will need to be working in the UK. Business trips overseas would not be a problem but if you were spending the bulk of your time working abroad then finding cover may be a problem.
• The policy may insist that you have held it for a minimum period before you could claim. This may be between 6-12 months.
• If you need cover against sickness and accidents, you may have some trouble finding cover (or it will be much more expensive) if you have an existing serious medical condition. The same could apply if you work in a very dangerous occupation (e.g. deep-sea diver) or participate regularly in dangerous sports and pastimes.
Finding the best deal
The cost of this insurance can vary significantly from one company to another and thinking about things a little could save you a lot of money.
A traditional source for these policies is the lender or finance company that originally advanced the loan. For some decades they have used their position of having clients who either have or are seeking loans, to sell their versions of protection insurance.
This has not always been a smooth process for them and their clients. Historically there were complaints of irregularities in the way they sold such insurance. This included cases where it was suggested that the insurance was necessary in order to secure a positive decision on the loan application. There were also cases where clients were sold insurance that was unsuitable for them such as covering sickness when they were already suffering from a serious medical condition.
Following investigations by regulatory and other official bodies, it is planned that these practices will be stopped. It has been proposed that lenders will need to wait until 7 days have elapsed AFTER loan approved before they will be able to offer a loan applicant this insurance.
Of course you can purchase this insurance at any time and not only at the time of taking a loan out. It’s possible to have had a loan for many years (e.g. a mortgage) and then decide to protect it with an appropriate insurance policy.
Even more importantly if you’re looking to save money and get the best deal, you do not have to purchase it from the lender or a loan company.
The reason that’s important is because the prices of the loan companies are usually several times more expensive than those of the direct specialist insurance providers that operate across the Internet.
So if you do wish to formulate a “what if” plan and use insurance as its foundation, looking at the sites of the specialist providers could be a step in the right direction. These providers have expertise in loan protection insurance and a large range of policies to suit most needs. It will cost you nothing to look and it could give a big boost to your peace of mind.