At first glance, the term 'debt insurance' looks a little strange. It seems like an insurance service that 'protects' the money that you owe creditors – a sort of anti-service for borrowers and consumers that are stuck in a financial rut. Not surprisingly, the term itself isn't a particularly accurate description – as debt insurance is actually a form of insurance that's designed to protect your family from debt.
How so? In the case of your death, your inability to continue working, or a lack of available funds to repay your debts, a debt insurance policy allows your family to clear your financial obligations without forcing itself into bankruptcy. It's a valuable service for people that are dealing with a large amount of financial commitments, particularly if those commitments are to high-interest lenders.
Debt insurance is available for individuals, independent businesses, and companies that are owned either by private investors or public shareholders. While the vast majority of debt insurance policies are sold to individuals, the service is incredibly popular in the business world. Leveraged company policies are commonplace in insurance, as are custom tailored 'debt relief' purchase packages.
Does it all sound a little too confusing? Don't worry, while debt insurance certainly isn't the simplest form of personal or business insurance, it's one that relatively few people will have to deal with in a typical employment circumstance. Instead, debt insurance is the type of service that's discussed in a business environment, often by founders and managing directors that own their own companies.
This simple all-in-one guide explains the basics of debt insurance for consumers, businesses, and in part for multi-shareholder companies. While it's certainly not a complete guide to the world of debt insurance, nor a legal recommendation for businesses, it is a valuable resource for startup founders in search of quick information, business owners seeking a solution, and independent freelancers.
Ready? Let's begin.
Debt Insurance for Individuals
For individuals, debt insurance is most frequently used to limit the risk of credit card debt and other short-term financial commitments spiraling out of control in the event of an accident, a interruption in your ability to work, or a rapid change in psychological condition. In simple terms, it's a way for individuals to limit their liability for credit card debts, personal loans, and independent mortgages.
This type of debt insurance is generally available directly from the credit card company in question, as credit card issuers generally purchase it at wholesale rates to insulate themselves from risk. For a borrower with extensive credit history, purchasing debt insurance for the entire amount of debt from a credit card or personal loan is a fairly straightforward process, often requiring a single phone call.
Alternatively, personal debt insurance is also available for larger debts and slightly higher sums. In general, many borrowers will opt to add a debt insurance element to their life insurance policy. This allows their family to claim for expenses related to owed debts and long-term financial obligations, although only when the policyholder has died and therefore activated the life insurance policy.
Finally, debt insurance is also available for vehicle financing and other mid-term lines of credit. An automotive insurance provider may be able to provide this service to borrowers and current clients, although it generally requires quite an extensive screening process. In many cases, this service may be included as part of a general automotive insurance package or contents-based insurance policy.
Debt Insurance for Businesses and Companies
Debt insurance is often sold as an additional service for businesses that use a credit card of other short-term loan to fund expansion and development. Dubbed 'payment protection insurance,' it's grown into a fairly controversial topic in business circles. As with personal debt insurance, some businesses have been forced into purchasing debt insurance with no knowledge of its presence.
This pushy sales style is typically performed by the banks offering business credit cards and small business expansion loans. In the late stages of applying for a business loan, bank employees use a standard sales technique to apply debt insurance to the transaction. This results in many businesses and individuals purchasing debt insurance without realizing that it incurs an additional expense.
According to the UK's Financial Services Authority, approximately forty percent of debt insurance customers are entirely or partially unaware of their policies existence. The service has a fairly high complaint rate amongst UK business owners and individuals, with a sizable portion of policies sold attracting complaints for unfair billing. Around 95% of these complaints have been upheld.
Insurance-heavy loans typically included those for business vehicles, secured loans for unspecified personal expenses, and conditional loans for businesses. As these debt insurance policies are issued by the same bank as the loan, they have attracted criticism for dispute processes and the amount of policies that result in near unanimous claim rejections – many claims are dismissed automatically.
As such, there's a noticeable divide between the number of individuals and business owners that use debt insurance with an understanding of its presence and responsibility, and those who have had the service effectively 'added' to their loans without any prior knowledge. Since 2006, significantly less debt insurance claims are being rejected using automated systems and somewhat unfair guidelines.
The Future of Debt Insurance
While debt insurance remains a major revenue generator for many financial services companies and insurance providers, its presence in the marketplace is slowly decreasing thanks to the initiatives of many UK and USA-based regulators. Financial companies have been fined for pushing these types of insurance offers unethically, while others have had misleading transactions successfully reversed.
Debt insurance is, in many cases, a service that borrowers benefit from. However, with a significant amount of insurance companies and major lenders pushing the service using unfair and misleading marketing methods, its days appear to be numbered. While valuable for some, the shady marketing tactics that surround debt insurance could eventually lead to its downfall as a mainstream service.