Loan Protection Insurance – When Do You Need It?

You don’t live in an ideal world where nothing bad ever happens. Hence, it may be worth considering loan protection insurance. You can’t bubblewrap every aspect of life, so why not go with the next best thing? Insurance. Insurance is there to make sure you’re protected if the worst does happen. But, what if the worst doesn’t happen?

There are a lot of ‘what-ifs’ surrounding types of insurance. Some people may even compare taking insurance with gambling. For this reason, before you take any insurance or make any financial decision, you must inform yourself. So, rather than talking about no credit check loans, or cash loans, today Monzi will be talking about all things loan protection insurance.

Please note that specific ideas and products presented in this article may not be on offer by Monzi or the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.

What is loan protection insurance?

When life flips you on your head and shakes your pockets out, loan protection insurance might look after you. Essentially, loan protection insurance (LPI) will help cover your loan repayments should you be unable to work. Usually, this will only come into effect if you cannot work due to illness or injury. However, there may also be other exceptions.

Loan protection insurance is available across multiple loan types, and it is up to you whether or not you wish to take it. Typically you can purchase LPI either when you apply for the loan or once the policy commences.

Consumer credit insurance

Consumer credit insurance (CCI) is simply another name for loan protection insurance. However, it is often the umbrella term encompassing the protection insurances across mortgage loans, personal loans, and credit cards.

If you are unsure about any terms you come across when searching for insurance of any kind, ask the provider. This way, you will be crystal clear on any contracts you eventually enter into. If you are looking for government-approved information, visit MoneySmart’s consumer credit insurance page for more details.

Is loan protection insurance compulsory?

No. The decision of whether you would like to take loan protection insurance is entirely your own. There may be some factors that influence whether you are more likely to apply for this kind of insurance. These could include:

  1. You have a volatile or dangerous workplace
  2. You’re illness prone or currently living with a potentially debilitating condition.
  3. You have a family that will be at risk without this insurance.

These are just some examples of why a person may want to consider whether they might require loan protection insurance. There has been some debate over the usefulness of this type of insurance. However, if you feel as though you may struggle with your repayments due to injury or illness, in future, LPI could be a good option for you.

Why would you need loan protection insurance?

Ultimately, you may not need loan protection insurance for many types of loans. This is because loan protection insurance will increase in value to you as you increase the size of a potential loan. This means that it is unlikely that you will struggle to repay small personal loans or a limited amount of credit card debt. Therefore you won’t need the insurance. However, if you are looking at a loan that could have a term of 30 years, loan protection insurance may become more viable.

This is because it is hard to foresee where your life will be that far into your future. This creates the ‘what-if’ scenarios that may prompt you to take out an LPI policy. You may also seek loan protection insurance if you start a new job in a risky field. These fields could include site work with risky reputations, the mines, the military, or law enforcement. Anywhere where there is a chance that you could be injured badly enough to require an extended period off. Another possible reason you may need LPI is if you have recently had a cancer diagnosis or a similar medical issue arise. Even if you have a high survival likelihood, you may be put out of work and require this insurance.

What does loan protection insurance cover?

Essentially loan protection insurance will help to cover your loan repayments under certain circumstances. For example, depending on the insurance company you choose, your loan protection insurance may cover involuntary unemployment, a severe illness diagnosis, injury, or redundancy. In some instances, it may completely pay off your loan if you are diagnosed with a terminal illness or if you were to pass away.

The main goal of this type of insurance is to protect your family from the financial burden of having to repay one of your loans should you pass away. In addition, if you are injured or unemployed, it will help give you the peace of mind that you have a helping hand available to you. Mortgage loan protection insurance is different from life insurance, as are other LPI types.

How much is loan protection insurance?

Depending on your eligibility and who your LPI provider is, you may expect to pay around $25 a month plus stamp duty. This figure may vary and is just to give you an idea of what you could be looking at spending.

When it comes to eligibility for loan protection insurance, there may be several criteria that you will have to satisfy. Of course, this will also vary depending on the loan type. For example, personal loans may have more relaxed standards for their LPI. For home loan protection insurance, however, some of the criteria could include:

  • Be an Australian or New Zealand citizen or a permanent resident.
  • You may be required to be within an age bracket, i.e. 18 – 60 years old.
  • In some circumstances, you may need to be working a minimum amount of hours per week, i.e. 20 hours.

These are a few possibilities when it comes to eligibility criteria. In some cases, your loan amount may have a minimum limit before you can apply to add loan protection insurance. Depending on the company, you may also have to show that you don’t exceed a maximum value across multiple insurance policies. If you are unsure where to start and what’s available to you, reach out to your insurance company and seek answers directly.

Is loan protection insurance different to income protection insurance?

Yes, there is a difference between the two. Whilst they both rely on you being injured or falling ill to claim, loan protection insurance is strictly for your repayments. On the other hand, income protection insurance is a small sum given to you for general expenses. Whether this is paying bills, buying groceries, or putting fuel in the tank.

Generally, unlike income protection insurance, you may never even see the money from loan protection insurance. This is as it could go directly to your lender without ever entering your bank account. Loan protection insurance truly allows you, in some circumstances, to put your repayments out of sight, out of mind. This can be very useful while conducting a job search or recuperating from illness or injury.

Life insurance as an alternative

In the event of your death, life insurance can be a handy thing to have. It may be an excellent substitute to loan protection insurance in some ways. Life insurance is all about relieving your family from any potential financial burden. Life insurance can be good as, depending on your policy, it can cover long-term and short-term expenses.

This means that not only would your funeral expenses be paid for, but so would your more significant outstanding debts such as home loans and student debts. If you are over the eligible age for loan protection insurance, you could take life insurance instead and essentially achieve the same result. Or, if you are a younger person that has been diagnosed with a terminal illness, life insurance may be a better option for you and your loved ones.

However, if it is unlikely that you will pass away any time soon, loan protection insurance may be the wiser option for you.

In what instances can’t you claim LPI?

As with life insurance, there are several situations where you won’t be able to claim loan protection insurance. These exclusions are in place to prevent people, unfortunately, from being able to abuse the system. Some of these exclusions may include:

  • Self-inflicted injuries
  • Voluntary redundancy, quitting or retiring.
  • Pregnancy and childbirth
  • War-related matters
  • Pre-existing medical conditions which render you unfit to work.
  • Seasonal or fixed-term contract employment

You also may not be able to claim within a certain period of applying. This buffer period works to stop people from intentionally seeking a payout from the insurance company. Not all of the above are exclusions for every insurance provider. If you cannot readily find an exclusions list on your provider’s website, reach out to a member of staff.

Best loan protection insurance?

Monzi cannot say which insurance provider offers the best loan protection insurance. This needs to be a personal decision to locate the cover that is right for you. We can, however, give you a list of things to look for when searching for a provider that aligns with your life circumstances.

Firstly you need to ensure that you qualify and meet the eligibility criteria. Once you have done that, you should consider asking yourself whether it represents value for money. Next, consider the premiums on the market for loan protection insurance. If these two things satisfy you, ask yourself whether it is personally in your best interest. This is especially important if this cover is an option when you apply for a loan, as this may not be the best available deal. Finally, check you don’t already have this coverage through packages such as income protection insurance or life insurance. It would be a shame to pay for something that you already have cover for.

loan protection insurance

Is loan protection insurance worth it?

There is quite a bit of debate over whether or not LPI is worth paying. Ultimately, this depends on what you have in savings and how you live your life. However, there is another instance where loan protection insurance could be a good decision. This is to maintain your credit score.

If you have been struggling in the past to raise your credit and repair your credit report, you don’t want to undo any progress you make. The ‘fix my credit’ process can be pretty tricky, meaning if you have finally received approval for a loan you have been chasing, you want to make all of your repayments. Doing so will reflect positively on you and your money management skills. Therefore you don’t want to hit a bump in the road where you can no longer make your repayments. Loan protection insurance may be able to help.

If, however, you work in a stable environment, are a healthy person, and have good credit, you may be able to forgo LPI. In some ways, your outlook on life may also influence the insurance you take. For example, a pessimist may be more likely to take this insurance than an optimist. It is your call.

How do you claim loan protection insurance?

If you have, unfortunately, had the bad luck that requires you to claim your loan protection insurance, you will first want to contact your lender or provider. Generally, you will do this, by phone, during business hours. In some situations, your claim may be able to be processed over the phone. However, if this is not the case, you will be sent the appropriate application forms to fill out and return.

You may also need to provide the appropriate documentation as evidence of your situation. For example, if it is a medical issue, you may be required to give your insurance provider access to certain medical records for reference. Once you give your provider the appropriate proof and documentation, they may pay the money as soon as possible. Please note that this money may go directly to your lender when your payments are due rather than to you. The claim process may vary depending on the loan type.

Is it tax-deductible?

No. Typically, the premiums paid on loan protection insurance, regardless of the loan type, are not tax-deductible. However, with a bundle of insurance, often, the only tax-deductible aspect of this bundle will be income protection insurance. Unless this insurance gets tangled up with your superannuation.

Loan protection insurance refund

There is no such thing as a general loan protection insurance refund. This is because you can either make a claim or opt-out of this insurance by cancelling your contract and ceasing payments.

The reason you may have seen talk of refunds in this field is because certain banks have decided to no longer offer loan protection insurance. This, thereby, resulted in the implementation of various loan insurance refund programs. If you belonged to one of these policies at the time but somehow weren’t aware of the refund, you may no longer be eligible for the refund as this was some time ago.

If you were never involved with this policy from any of the providing banks, all this means for you is that you can no longer take one of these policies from those banks. As there are several other potential providers, this does not mean that you cannot take a loan protection insurance policy at all.

Mortgage loan protection insurance

Loan protection insurance for a home loan is likely the most common use for this kind of insurance. This is due to the size and term of such a loan. Unless you fall ill with only a few years left on your mortgage, home loans aren’t a quick fix. Therefore, taking protection insurance on a home loan is practical. However, familiarising yourself with the processes your lender can install if you have difficulty repaying, may be helpful. Using a lender’s payment plan or repayment freeze could be a much cheaper option than taking insurance.

Personal loan protection insurance

Personal loans, on the other hand, may seldom need protection insurance. This is as it is likely you are only taking small cash loans. Which, in some cases, are a lot easier to repay. As a general rule of thumb, you shouldn’t be taking a personal loan that you can’t repay. By law, lenders should also not be approving you for a loan that you won’t be able to repay.

Luckily, you can avoid this situation, the lenders in Monzi’s network are responsible and want the best for you. Therefore, a denied application is always in your best interest. Monzi lenders may also offer payment plans if you are struggling; reach out to them directly if you need repayment help.

How to cancel loan protection insurance?

Quite a few banks no longer offer this type of insurance, meaning if you were with them, your policy most likely no longer exists. However, if you have a policy from a sole insurance provider and no longer want it, you should reach out to them.

It is difficult to precisely say how this process may occur, as each provider will operate differently. However, you may need to make your payments until the end of the year in some situations. So, again, this will come down to how your insurance provider operates.

At what age can you get loan protection insurance?

As with some other types of insurance, there may be age limits on applications. It is safe to say that the minimum age to apply for loan protection insurance is 18. The oldest you can be, however, might be around 60. Depending on the type of insurance you are seeking, this could be for multiple reasons. For example, health insurance premiums can rise as you get older due to increased chances of you needing to make a claim.

Although, when it comes to loan protection insurance, you may not be able to apply if you are a senior for a couple of reasons. The main reason is that the elderly have a shallow approval rate. This is often as they are on the pension or Centrelink payments as their only form of income. So if the elderly can’t take a loan in the first place, it is unlikely that loan protection insurance will cater to them.

Monzi lenders, however, may be able to offer Centrelink loans. Therefore, personal loan protection insurance may not be as restricted by age, as personal loan eligibility can be flexible.

Advantages and disadvantages of loan protection insurance?

As with any financial decision, there will almost always be pros and cons attached. Here is a basic list of the pros and cons that may come with loan protection insurance.

Advantages

The most significant advantage associated with this kind of insurance is peace of mind. Not only do you not have to think about your loan, but if you are ill or injured, your money can go towards medical bills instead. It will also allow you to get the required rest to heal your body so you can get back to work. This insurance will also help safeguard your credit score so that you don’t have to start from rock bottom when you get back from your time off.

Disadvantages

The main con of this kind of insurance, and most types of insurance, is that you may not know if you will ever actually need it. You may never get in a situation that requires you to make a claim, and therefore means that you may be wasting your money. You may also unknowingly fall into the exclusions category, meaning your provider may refuse your claim. Ensure you understand all of the fine print before purchasing loan protection insurance.

Gap insurance and loan protections

There are several loan protection options on the market. One you may not have heard of that could be helpful is Gap insurance. Let’s say you buy a car for $20,000. It’s shiny, has nice trim, and feels good to drive; you love it. Unfortunately, however, you left it in a safe spot, and another car happened to crash into it so severely that it’s written off. The other vehicle’s driver will have to pay the majority, $18,000, but what about the rest of it?

This is where gap insurance comes in. Also referred to as motor equity insurance, gap insurance will cover the $2,000 gap that the other driver didn’t. This then allows you to go back and purchase a car of the same make and model without being out of pocket. Again, there is no guarantee that you will require this insurance. However, it can be helpful if you love your car and want to be wholly insured should something happen.

Loan protection insurance calculator

There are many calculators online designed to help you figure out what you will be entitled to in different situations. Whether it be a loan repayment calculator or a home insurance calculator. Unfortunately, there aren’t any calculators for loan protection insurance. If you aren’t sure how much you will be entitled to, you will need to speak with your provider. Alternatively, if you are trying to pick the right provider or policy for you, you may be able to find a free comparison tool.

Comparison tools will help you compare all the insurance market options alongside their features and costs. This can be useful for narrowing down your research. Look for a loan protection insurance comparison tool when doing your research to see how it might help.

Does Monzi need loan protection insurance?

You can get loan protection insurance for your personal loans whether they are through Monzi or not. However, we cannot say whether this insurance is offered directly by our lenders.

You won’t need insurance for any loan you take through the Monzi network if you don’t want to. Our process is designed to be simplistic, meaning we cut out the extras that slow things down. That’s why our approach is 100% online and paperwork free. This enables us to potentially match you to a lender in as little as 60 minutes if you apply during business hours.

You can use a Monzi personal loan for whatever you want. So, whether it be a construction loan, car loans, or just fast loans, Monzi is eager to try and help.

Want to stay in the loop?

We’d love to keep in touch. If you have any questions or are chasing a bit of help, reach out to us at hello@monzi.com.au. Or, you can visit our social media. We have profiles on Facebook, Instagram, Twitter and Pinterest, and we can’t wait to see you there!

Alternatively, why not check out our article on how to access super early?

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Costs

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You won't use a penny to apply for our lender-finding service, but here's some costs you could expect from a lender

Loan amount

$300 - $2,000

Terms

12 months (minimum)

12 months (maximum)

Costs

20% upfront establishment fee

+ 4% monthly fee

Example

Loan Amount of $1,000 over 6 months repayable weekly (25 weekly repayments). $1,000 (Principal Amount) + $200 (20% Establishment Fee) + $240 (fees based on 4% per month over 25 weeks) = $1,440 total repayable in 25 weekly installments of $57.60.

Under the current legislation, most small personal loan providers don’t charge an annual interest rate (you’ll know this as an APR) %. The maximum you will be charged is a flat 20% Establishment Fee and a flat 4% Monthly Fee. The maximum comparison rate on loans between $300 and $2000 is 199.43%. The minimum and maximum loan term is 12 months. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

Loan amount

$2,001 - $4,600

Terms

13 months (minimum)

24 months (maximum)

Costs

48% Annual Percentage Rate (APR)

67.41% Comparison Rate p.a.

Example

Loan Amount of $3,000 over 18 months repayable weekly (78 weekly repayments). $3,000 (Principal Amount) + $400 (Establishment Fee) + $1,379.06 (reducing interest) = $4,779.06 total repayable over 18 months with weekly installments of $61.27.

The Annual Percentage Rate (APR) for Secured Medium Loans is 48%. The Typical Comparison Rate is 67.41% p.a. The minimum loan term is 13 months and the maximum loan term is 24 months. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.

Loan amount

$5,000 - $10,000

Terms

13 months (minimum)

24 months (maximum)

Costs

21.24% Annual Percentage Rate (APR)

48% Comparison Rate p.a.

Example

Loan Amount of $10,000 over 24 months repayable weekly (104 weekly repayments). $10,000 (Principal Amount) + $5,577.12 (Interest) = $15,577.12 total repayable over 24 months with weekly installments of $149.78.

The Annual Percentage Rate (APR) for Secured Large Amount Loans is 48%. Maximum Comparison Rate is 48% p.a. The minimum loan term is 13 months and the maximum loan term is 24 months. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.