As an individual or a business, you might have some form of outstanding debt. But how will you repay it in the event of death, disability, unemployment, or bankruptcy? Such situations can put your loved ones under financial duress or weaken the financial stability of your business. Credit insurance guards you against such risks.
It is a type of insurance coverage that helps you repay your existing debts in case of death, disability, bankruptcy, etc. Credit protection insurance is your financial backup in times of catastrophes. If you cannot close your debts for certain reasons, the credit insurance policy will repay it on your behalf.
Types of Credit Insurance in India
You can get a credit protection cover as a business or an individual. In India, you can avail of five types of credit insurance-
1. Credit Life Insurance
This credit insurance policy guards you against credit risk due to death. If you have existing debts at the time of your debt, the policy will repay it on your behalf. This protects your loved ones from paying for your debts out of their pockets.
2. Credit Disability Insurance
This type of credit insurance is also called credit accident and health insurance. As the name suggests, the policy pays off your existing debts in the event of disability. Under this credit-linked insurance plan, the policy will make monthly payments against your debts. But remember, this credit protection insurance comes with a waiting period before you can avail of the benefits. This means you can’t buy the policy and make a claim on the same day.
3. Credit Involuntary Unemployment Insurance
You can use this credit insurance policy to repay your debts if you become unemployed or lose your income source. You can only avail of the policy benefits in the event of involuntary unemployment. For example, you cannot make a claim if you quit your job. With certain policies, you may have to be unemployed for a specified period before the credit-linked insurance pays your minimum payment.
4. Credit Property Insurance
This credit insurance cover protects the property you have used as collateral against the debt. It protects your property against theft, damage, or natural disasters.
5. Trade Credit Insurance
This credit protection insurance is specifically designed for companies that sell goods or services on credit. It protects you from bad debts when your clients cannot make the repayment. It is different from consumer credit insurance for individuals.
What Does Credit Insurance Cover?
Credit protection insurance covers two primary types of risks- commercial and political.
- Insolvency or bankruptcy of the buyer
- Non-payment by the buyer
- Cancellation of the import license
- Wars, riots, insurrection, etc.
- General payment moratorium by the buyer’s country
- Political events that prevent payment
- Non-payment by a government buyer
- Non-payment due to natural calamities in the buyer’s city or country
What Is the Credit Insurance Premium?
Your credit cover premium will depend on multiple parameters like the debt amount, type of credit, and insurance policy. There are two ways to pay your credit insurance premium-
Single Payment Method
In this method, the insurance provider will calculate your total credit insurance premium at the time of application. You will have to pay the full premium when you purchase the policy.
Monthly Outstanding Balance Method
This method is more popular for credit card bills, home loans, and other similar debts. Under this method, you can pay the premium of your consumer credit insurance in 2 ways-
- Open-end accounts: This is a monthly premium that can vary based on your monthly debt. If your debt amount changes every month, so will the premium.
- Closed-end accounts: This is a fixed monthly premium where the amount of your debt does not change. The insurance provider will cancel your credit insurance coverage if you fail to pay this amount.
Credit insurance is an excellent way to protect your loved ones or business against credit risks. But before you apply for credit insurance, make sure you read all policy documents carefully to make an informed decision.
You can also get a personal loan from Tata Capital to pay off your existing debts and reduce your credit risk.