If you're in the market for a loan, then perhaps you should consider taking out a loan insurance policy. A loan insurance policy covers various scenarios, both for a single or joint-life.

A loan policy does not necessarily have to tie in with the loan in question, and often an existing insurance policy could offer protection for loan purposes.

Your lender should be able to advise whether you need protection for your loan. You could also call in the help of an independent financial advisor, who should be able to give more comprehensive advice on the wide range of options available.

Different types of loan insurance

The most common type of loan insurance is known as a Payment Protection Insurance (PPI). A PPI necessitates monthly instalments along with the loan, and covers the policy holder in the following scenarios: accidents, sickness or unemployment. Payments to a PPI policy usually stretch over a period of one to two years.

Another form of insurance is known as a Permanent Health Insurance (PHI), or full income protection policy. This type of policy protects the holder against disability or long-term sickness. It is based on the income of the individual taking out the policy, and not against the loan payments, as such. A PHI policy often has a longer pay-out period; often up to retirement age if necessary. Take note though that a PHI policy is generally more expensive than a PPI policy.

Other policies include life insurance, which also covers single or joint-life applicants. This type of cover may pay out a regular income in the event of the death of the policyholder, or a lump sum. Such a policy could also include critical illness cover. This gives the policyholder the same benefits as the main plan, but pays out with the diagnosis of a critical illness. Of course, you should check the fine print of each policy and additional cover.

How much does it cost?
Several factors determine the price of a loan insurance policy. The type of cover you require, the size of your loan or monthly instalment, the repayment term and your age are all factors that will determine how much you pay. Health factors are also worked into the equation.

A loan adviser should be able to give illustrations and quotations to the end of informing you, the applicant, before you make your decision. Make sure you read the fine-print and that the policy covers your case well. It is a good idea to remember that the cheapest option is not necessarily the best option.

Is the cover necessary?
You may not think that you require a loan insurance policy. the additional cost may scare you off. This could cost you though. No one can predict the future, and a little extra protection goes a long way. Instead of making it out to be useless, consider shopping around not with the loan insurance payment as optional, but rather as part of the package.
if you are not covered, things may get out of hand. You could end up struggling to meet payments, or build up a bad credit record. A worst-case scenario could see you lose your house, or loved ones left with huge debt burdens if you were to die.

Treat loan protection as high priority when taking out a loan.