Having spent a lot of time in the financial services sector, I never thought much of payment protection. That seemed to me to be for people who either lacked top-notch financial management skills or for those who never carried insurance.
However, as I was recently going over my own insurance situation, I was surprised to discover that I actually had exposure under certain circumstances that might need to be addressed. In doing so, I realized there are five really great reasons to take a second look at payment protection if you’ve previously dismissed it – or to take a first look if you’ve never considered it.
Payment protection is a broad-based term referring to both credit insurance and debt protection products. While they differ as far as their regulatory structure, they effectively offer the same thing to consumers – the removal of one’s obligation to make some or all payments to a creditor if certain conditions occur.
We talk all the time about “living a healthy life”, “being prepared for an auto accident”, “watching out for injuries”, but few people talk about a huge exposure for many people: their financial well-being. In a day and age where your credit score is everything, it is short-sighted not to consider exposure to that important element of life.
So ignore the public policy papers and “non-biased” consumer websites that tell you that payment protection is a rip-off and unnecessary and pointless. Instead, consider these five factors very carefully and tune out the noise.
Reason #1: You Are Not as “Planful” as You Think
A minority of Americans have sufficient emergency reserves. In fact, an astounding majority of people would struggle if their paychecks were delayed for one week and over half would find it difficult to replace a month of earnings from their liquid savings.
You tell yourself: that’s not me.
Even if you earn what you think is enough income, how many of us actually have a budget (and stick to it), including emergency savings. That can spell problems for cash flow when you need it most. Suppose you get disabled and cannot work. You have no income and your medical expenses usually increase, while all of your other obligations continue: tuition, daycare, cell phone, internet, auto loans, home loans, you name it.
Payment protection products provide financial relief from those ongoing debt obligations when you need it most: when that expensive surprise occurs.
Reason #2: You May Be Underinsured
The purpose of payment protection is to forgive the debt you owe to your creditor(s) if you die, become disabled, or lose your job (these are the typical “big 3” events). Most people today have creditors. Many Americans have some kind of insurance in the household, but looking under the covers is revealing.
Most people have auto and home insurance, but 4 in 10 – that’s almost 130 million Americans — do not have life insurance and a whopping 7 of 10 of us in the private sector don’t have access to long-term disability insurance (and even if we did, we only get partial income, typically 60% of what we earned before disability). And good luck trying to get individual unemployment insurance on the open market.
If you have a mishap and are not covered, you will first need to take care of that mishap. However, your creditors still need to be paid and you may not have the money to do so. Payment protection fills that gap.
Reason #3: It’s Affordable and Easy to Get
Unlike most other insurance products, which require lengthy underwriting, payment protection usually has no underwriting and is available to everyone. It is usually something that is easy to get right at the point-of-loan. You only buy what you need: coverage is for the amount you owe. It tends to be extremely cost-efficient, such that you aren’t saddled with huge payments every month, but rather a small fee that is reflective of the risk of the creditor losing the commensurate value of this principal.
Reason #4: It’s Easy to Understand
Federal and state laws require full disclosures when it comes to payment protection. There aren’t traps or hidden fees or confusing language. Most creditors and their salespeople are held to pretty strict internal controls and compliance rules with big penalties, so they have incentive to explain payment protection products clearly.
Nevertheless, as with every insurance product, just take your time and read the disclosure. There’s no rush. Read exactly when the coverage kicks in and what it pays, as well as what it costs. Ask questions. Make a careful decision.
Reason #5: Consider What Happens If You Don’t Have it
Part of individual risk management is decision-making, and part of decision-making is accurately assessing both your risk and the consequences if something unfortunate happens. We tend to dismiss the notion that tragedy or even mild misfortune will occur to us. Surely it will happen to someone else.
Consider not only the possibility of misfortune, but your exposure. If you exposure is high enough, then the fees paid to protect yourself may well be worth the cost. If you have excellent credit, ample emergency reserves and your exposure is mild, then perhaps payment protection may only make sense if the fees are low enough for you not to miss it.
But never forget Murphy’s Law. That’s why insurance exists.