Nobody questions the need for health or auto insurance, where the chances of a costly mishap can be relatively high. Few question the need for homeowners insurance. Life and mortgage insurance have significant utility for anyone with a family or a mortgage.
Virtually every carrier presents these products as being necessary and useful. Yet there is another insurance product that few people know about, is rarely discussed and which some experts say is critical for the protection of individual investors’ portfolios.
Tom Keepers, executive vice president of the Consumer Credit Industry Association, believes credit insurance and debt protection, also known as payment protection, should be integrated as part of a household’s overall financial plan.
“We protect our lives, health, autos and homes, yet our financial well-being often depends on making good with our creditors,” he says. “Not only is credit access essential to Americans, but credit scores are the beating heart of our financial bloodstream. Why aren’t we protecting this vital organ with cost-effective, easily accessible protection products?”
Because the products are available at the point of loan and often do not require underwriting, Keepers says they can form the core of financial protection or be inserted into existing financial plans.
“Americans are underinsured. In 2013, some 3 in 10 Americans lacked life insurance, worsening to 4 in 10 this year,” says Dick Williams, president and CEO of The Plateau Group, an insurance holding company in Crossville, Tennessee. “Typical coverage provides protection for life, disability and/or involuntary unemployment that helps pay debts. But if one’s health is such that life insurance is not affordable, or one’s occupation does not lend itself to affordable disability coverage, payment protection fills the gap.”
When is payment protection insurance needed? “The majority of Americans have little margin of error should they have a financial mishap,” Williams says. “More than half of Americans have less than one month worth of savings, and for the past quarter-century, half see a significant decline of income at some point in their lives.”
For those who aren’t struggling as much but who have an investment portfolio and long-term goals, any hiccup could force an alteration in that plan, including the sale of securities. That could generate capital gains taxes.
Meanwhile, the labor force participation rate is at a 40-year low. The risk of unemployment is growing, along with the risk of not being able to pay creditors. The New York Federal Reserve reports that the American consumer is taking on more credit, fostering the need for payment protection.
“Suppose a primary breadwinner takes out a $20,000 loan for a car so she has a reliable vehicle to commute to work,” Williams says. “If, God forbid, she becomes disabled and does not have payment protection on the loan, there’s a real possibility she will default, her credit history will be damaged and the family’s livelihood will suffer. The family would likely be faced with increased medical expenses and loss of income during her disability, increasing the likelihood of loan default.”
In that scenario, the breadwinner would be able to care for her family if she has credit insurance or debt protection. “The car payments will be made, her credit will remain clean and she will be able to keep the car,” he says.
How much does payment protection cost? It varies by state and insurer, but Williams describes $20,000 in coverage as “frequently costing less than an individual insurance product on the open market for the same coverage amount. It is a cost-efficient transaction, with rates set by each state’s insurance department, following periodic reviews of industry premium rates and losses.”
Just like any voluntary financial product, Keepers said, individuals should always make a cost/benefit/risk analysis when deciding if payment protection is right for them. Individuals who don’t feel the cost of protection is commensurate with their risk of default may not want to use the product.
“People with really robust cash flow, or who have sizable emergency reserves and who are disciplined in paying creditors may find payment protection isn’t right for them. The product is designed for those who run into trouble yet don’t enjoy that level of cash flow,” he says.
Those who have a loan co-signer may not need protection. While co-signers are willing to take on the debt if the primary borrower fails, it doesn’t mean they are happy about doing so. Keepers thinks it’s better to have protection, but acknowledges that it depends on the co-signer’s relationship with their backstop.
Keepers says that those with excellent credit ratings who have long relationships with certain creditors may get a pass if an occasional payment is missed. Credit card companies, for example, want to maintain good relationships with their best customers. If a debtor misses a payment but makes good on it shortly thereafter, some credit cards will not report the missed payment and may even waive a late fee. However, payment protection products protect a series of missed payments. So you may get a pass on one payment, but that’s where it probably stops.
“Every choice for protection comes down to one’s personal feelings about risk,” he says. “People must honestly assess how they feel about every situation and what happens if things go wrong.”
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Why Payment Protection Insurance Is a Growing Necessity for Investors originally appeared on usnews.com
