Creditor Protection Insurance
Creditor insurance is usually available as part of a group insurance policy, rather than an individual policy. Group polices are generally less expensive than the individual type. The lender is the owner and beneficiary of the group policy. The borrower is known as the insured.
For example, a bank wants to insure all its mortgage customers. The bank applies for a group creditor insurance policy. The insurance company weighs the risks of the entire group with the price of the policy. Each customer pays a fee, called a premium, to be covered under the policy. As a result, the bank customers pay a lower fee than if they each bought an individual insurance policy.
Decreasing term life insurance may be used to cover a mortgage loan. As the customer pays the mortgage each month, the outstanding balance – the amount that is insured – is lowered. The amount of the death benefit will be lowered to match the remaining loan balance. As a result, the premiums can also be lowered each month.
Creditor insurance can also be used to insure credit card balances. These policies are sometimes called credit card protection programs. The customer can choose to purchase life or disability insurance, or both. The cost of the policy varies each month, based on the credit card balance. When the customer has a zero credit card balance, there is no premium due that month.
Banks may also use creditor life insurance policies for business loans. If a bank loans money to a business owner, the bank may require a life or disability insurance policy for the owner. Such policies help ensure that the loan will be repaid. This coverage is especially important if the owner’s work creates the main source of revenue for his company.