Loan Protection Insurance is Your Last Resort

No matter what the fast-talking guy says as he dangles the ballpoint before you, you do not need loan protection insurance.

When you accept a credit card or negotiate for a consumer loan, eager salespeople will urge you to “enroll in” their payment protection plans, stressing the low cost of such huge peace of mind. When you finance a new car or a major appliance, you want to protect your acquisition from repo-man’s big mitts, and loan protection insurance seems an expedient way to safeguard your big-ticket item. You do, however, have far better alternatives. Note that loan protection plans do not protect your income or credit; they simply assure that this one creditor will receive his regularly scheduled installment payments. This unnecessary point-of-purchase pitch may, in fact, suggest an opportunity to walk away from the whole deal, because loan protection cannot determine your creditworthiness, and it does more to protect your lender than to protect you.

Consider wise alternatives to loan protection insurance.

If you feel uncertain about your long-term job security, you should focus your attention on cutting costs, retiring debts, and saving. Except in dire emergency, you should avoid new consumer debt as if it were a deadly virus. Naturally, your home mortgage represents your first and most important obligation; and, if you put less than 20 percent down on your purchase, you already carry mortgage insurance. Moreover, unemployment benefits will cover your mortgage and home expenses for 99 weeks. With mortgage interest rates at historic lows, you should look at refinancing your mortgage if you can save at least 1.5 percent on your annual percentage rate or if you substantially can reduce the loan’s term at the same monthly payment. Then, focus your financial strategies on meeting the rest of your obligations. Instead of wasting your money on loan protection insurance, you should…

• Build an “emergency fund”

Following the time-honored rule of making yourself your first creditor, putting at least ten percent of each paycheck in savings before you start paying your other bills, build a balance of at least $1000 in a traditional savings account. You and your family must understand you save this money strictly for emergencies, and your account should guarantee your access to the money without restrictions or penalties.

• Save the equivalent of six months’ salary

When you have secured your $1000 emergency fund, establish a second account for income protection. As you set-up and manage this account, focus on decent returns instead of liquidity, and take moderate risks to accelerate the account’s growth. When you gave set-aside the equivalent of six months’ salary in this account, you may let it grow on its own momentum while you diversify your investments or double-up your home mortgage payments.

• Pay attention to the duck

If you already have celebrated your fortieth birthday, disability poses greater threat to your income than unemployment does. Therefore, secure high-quality disability insurance that will pay your bills and give you cash when you suffer long-term illness or must endure a protracted recovery from an injury. Unlike loan protection insurance, disability coverage delivers payments directly to you, allowing you to use the money according to your needs and priorities.

• Eliminate credit card debt

To free-up more money for savings and investment, aggressively retire your credit card debts. You even can download a smartphone app that shows you how to plot your pay-off strategies according to highest balances and interest rates. In order to start building wealth, you should pay off all but one credit card, using that single card only for purchases you can pay-off in a single billing cycle.

• pay-off or downsize the car and your other luxuries

Take a deep breath and acknowledge you do not need a Lexus when a Camry will do. The same principle applies to all your luxuries. You can live happily and far more securely without them. Following the strict rules of wise family finance, divert savings from these items into a life insurance policy that builds cash value while it assures your family can maintain its quality of life even in your absence.

Family financial planners concede that building the family’s wealth requires some sacrifices and attitude adjustments, but they insist it need not require suffering. Advisers remind clients how the satisfaction and security they feel with money in the bank far outweigh the cheap thrills of conspicuous consumption. When you wisely manage your money to build wealth, you never will need loan protection insurance.