What Is Unemployment Protection on a Loan?

Unemployment protection is a type of insurance that you can buy when you get a mortgage or personal loan. It kicks in if you lose your job to make payments on your behalf so you don't lose any.

Having unemployment protection can give you peace of mind, as well as protect your credit score by preventing you from missing payments. However, unemployment protection can be expensive. Also, if you add insurance to your loan, you will likely pay interest on the insurance premium, increasing the total cost of the loan. As a result, unemployment protection is not suitable for everyone.

Let's take a look at how unemployment protection works on a loan and when it might make sense to use it.

What is unemployment protection on a loan?

Unemployment protection is an insurance policy that you can buy when you get a loan. It is designed to make payments on your behalf if you lose your job and cannot pay them.

However, keep in mind that this type of mortgage protection insurance (MPI) purchased with a residential loan is different from private mortgage insurance (PMI) in that the PMI is designed to repay a lender, not you, the borrower, if you default on your loan and your home is not worth enough to pay off the debt in full. PMI does not apply to job loss, disability or death, and you will not pay your mortgage if any of these things happen to you.

Also, mortgage protection insurance often costs more than life insurance, especially for healthy adults. The premium can be a percentage of the total payments on the secured loan, which is paid at the time of the loan and repaid in the borrower's monthly loan installments. Other policies may not be priced the same during the coverage period, which can extend up to a 30-year mortgage.

Unemployment protection is also sometimes called credit insurance. There are four main types of consumer credit insurance, depending on the type of difficulty that prevents you from making your loan payments:

Involuntary Unemployment Insurance: Pays off your loan if you lose your job.
Credit life insurance: pay off your loan if you die
Disability credit insurance: Make your loan payments if you are too sick or injured to work for a period
Credit Property Insurance:  Covers the property you used to secure a loan if it is damaged or destroyed

It's important to note that unemployment protection, or involuntary unemployment insurance, is only for making your loan payments if you lose your job due to layoffs, general strikes, lockouts, or union disputes. You must be able to show that the job loss is involuntary and not your fault.

Please note that self-employed persons, including self-employed contractors, are not eligible for this coverage in most states. Also, you must qualify for state unemployment payments to receive this benefit in most cases.

How does unemployment protection work on a loan?

Unemployment protection, or involuntary unemployment insurance, can be offered in a loan when you first get it. It is optional coverage and you can choose to decrease it. Also, a lender cannot add it to your loan without your consent. Credit insurance, including unemployment protection, must be disclosed as part of your loan offer.

Once you get it, you pay a premium, and if you lose your job involuntarily, you can file a claim.

For example, you can obtain a personal loan and purchase loan protection against unemployment with it. After a few months, you get fired. As a result, you have no income, so you cannot make loan payments. The next step would be to file a claim with the insurer that provides the protection. Your lender can help you fill out the claim documentation, so it may make sense to find out what services they offer.

Once your application is verified, loan payments will be made on your behalf during the period covered by the policy, which generally lasts from several months to approximately five years. This will prevent you from missing payments and possibly damaging your credit score.

Do I Need Unemployment Protection on a Loan?

Some lenders offer credit insurance as part of a loan package. However, they cannot make this a condition of your loan. Borrowers who are unduly pressured to choose optional credit insurance can file a complaint with the state attorney general, the state insurance commissioner, or the Federal Trade Commission (FTC).

However, depending on your situation, it might make sense. If you have a high income and have more income to lose, or if you have a larger loan and are concerned about what will happen if you cannot make your payments, unemployment protection can give you some peace of mind.

However, there are other ways to protect your finances without purchasing involuntary unemployment insurance with the loan. For example, you can create an emergency fund designed to pay off the loan in the event of a job loss. You can also use other resources, such as government unemployment benefits (if you qualify) to help replace your income.

Finally, there are some lenders who offer a level of unemployment protection without the need for insurance. For example, SoFi will allow you to pause personal or student loan payments while looking for a new job, as long as you meet certain requirements. It may also be possible to talk to your lender and come up with a deprivation or tolerance plan during unemployment.

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Source:Freedomtax Accounting

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