If you succeed in obtaining a loan, or if you have one already, probably one of the last things you might want to consider is paying an additional premium each month for the benefit of loan insurance. Skimping on this useful piece of protection, however, could prove a false economy. When compared with the hundreds of thousands of people currently struggling to manage their debts, however, the modest cost of loan insurance premiums might instead appear a small price to pay for increased peace of mind and financial security.
Individual casualties of the current economic recession are the record numbers of people in Britain struggling with unmanageable debt. Indeed, some analysts have estimated that as many as one in 60 people are facing insolvency – the inability to pay their debts as they fall due – according to a report in the Guardian newspaper on the 6th of February 2009. This proportion of the population includes not only the 29,000 or so actually declared bankrupt last year, but the estimated 110,000 who have negotiated formal individual voluntary arrangements with their creditors and the estimated 700,000 or so who are struggling to manage their finances through less formal debt management plans.
Anyone with a loan, of course, has a debt – and usually an ongoing debt that needs to be serviced by regular, monthly repayments. That debt can begin to spiral out of control when it is no longer possible to maintain the monthly repayments. And the most common reason for it becoming impossible to maintain the repayments, of course, is because of a temporary loss of income that stretches over several months or more. This can happen when an accident or an illness prevents the individual from going into work. Whilst some employers might continue to pay a sickness benefit in lieu of pay for a certain time, even this will be withdrawn eventually – and it is then that the employee faces severe financial difficulties. This same pressures will be felt, of course, by those made redundant and face the loss of any regular pay at all during the period of unemployment until alternative work van be found.
Loan insurance is designed to cover the policy holder against all such risks. In the event of an accident, illness or redundancy, the insurance pays out a regular, monthly benefit from which to make the repayments on any outstanding loans or borrowing and, thus, helps to avoid the pitfalls of spiralling debt.
Loan insurance can be used in this way to protect loans and borrowing of practically any scale. The premiums are based on each £100 of repayments insured, so it is easy to calculate the multiples required to cover the loan or loans in question. As a general rule of thumb, it is possible to insure up to a typical maximum of £1,500 a month in this way, or the equivalent of up to 50% of the policy holder’s normally earned income, whichever is less. One in payment, the insured benefits continue to be paid every month that the policy holder remains incapacitated or unemployed, or for up to a typical maximum of 12 months, whichever is the shorter duration.
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