Credit Disability Insurance – Definition

Cite this article as:"Credit Disability Insurance – Definition," in The Business Professor, updated February 29, 2020, last accessed August 11, 2020, https://thebusinessprofessor.com/lesson/credit-disability-insurance-definition/.

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Credit Disability Insurance Definition

Credit disability insurance is insurance coverage that provides additional safety by helping make payments when one is incapacitated to work for a period of time. A disability can stop you from the income you need to meet monthly loan obligations. However, with credit disability insurance, monthly loan payments may not be a problem.

A Little More on What is Credit Disability Insurance

When you go for a personal loan, you are offered a credit disability and or credit life insurance. Credit life insurance is for covering a loan you may have with the bank in case of death. Credit disability insurance, on the other hand, covers loan payment in case you suffer a disability that makes you unable to work.

What disability insurance does is to help maintain your good credit score. If you suffer disability and you are not able to work, credit disability insurance will ensure that the loan payment to the lender continues as usual. The insurance provides funds that will cover any loan you owe the lender throughout that period you disabled.

To know whether or not you need to secure credit disability insurance, it will depend on two things:

  • First, if your family will be left with an obligation of covering your debts if you happen to die
  • Secondly, if you do meet the requirement for a more flexible and cost-effective form of coverage like a time life insurance

How Does Credit Disability Insurance Work?

This type of policy is sold to lenders like credit unions or banks who offer customer coverage when they want to obtain a loan. The bank then ties the face value or benefit to your outstanding balance, and it reduces with time as you continue to service the loan.

Why is Credit Disability Insurance Important?

  • Credit Protection

Creditors will consider payment history when evaluating your credit risk. This way, they are able to decide whether or not to offer you credit. A history of a one-time payment is an indication that you are a responsible borrower. On the other hand, a poor history payment means that you are a risky borrower.

  • Property Protection

We all enter into a financial agreement with the lender in good faith. The lender gives you all the finances you need to purchase your family home or car, trusting that you will make regular payments as required. However, since life is unpredictable, you may become ill or disable.

This state may make it difficult for you to continue servicing your loan. That is where credit disability insurance becomes important. It will help cover the debt and you and your family don’t have to lose the property through auction by the lender.

References for Credit Disability Insurance

https://www.insurance.ohio.gov/Consumer/Publications/CreditLife.pdf

https://www.valuepenguin.com/life-insurance/credit-life-disability-insurance

https://www.spectrumcu.org/loans/insurance/credit-disability-insurance

Academic Research on Credit Disability Insurance

Credit Life and Disability Insurance Disclosures Under Truth-in-Lending: The Triumph of Form over Substance, Sheffey, J. M. (1980). Credit Life and Disability Insurance Disclosures Under Truth-in-Lending: The Triumph of Form over Substance. Fla. St. UL Rev., 8, 463.

Regulated credit life and disability insurance and the small loan, Vernon, D. H. (1954). Regulated credit life and disability insurance and the small loan. NYUL Rev., 29, 1098.

Disability risk, disability insurance and life cycle behavior, Low, H., & Pistaferri, L. (2010). Disability risk, disability insurance and life cycle behavior (No. w15962). National Bureau of Economic Research.

Framing, probability distortions, and insurance decisions, Johnson, E. J., Hershey, J., Meszaros, J., & Kunreuther, H. (1993). Framing, probability distortions, and insurance decisions. Journal of risk and uncertainty, 7(1), 35-51. A series of studies examines whether certain biases in probability assessments and perceptions of loss, previously found in experimental studies, affect consumers’ decisions about insurance. Framing manipulations lead the consumers studied here to make hypothetical insurance-purchase choices that violate basic laws of probability and value. Subjects exhibit distortions in their perception of risk and framing effects in evaluating premiums and benefits. Illustrations from insurance markets suggest that the same effects occur when consumers make actual insurance purchases.

Unemployment insurance and disability insurance in the Great Recession, Mueller, A. I., Rothstein, J., & Von Wachter, T. M. (2016). Unemployment insurance and disability insurance in the Great Recession. Journal of labor economics, 34(S1), S445-S475. Social Security Disability Insurance (SSDI) awards rise during recessions. If marginal applicants are able to work but unable to find jobs, countercyclical Unemployment Insurance (UI) benefit extensions may reduce SSDI uptake. Exploiting UI extensions in the Great Recession as a source of variation, we find no indication that expiration of UI benefits causes SSDI applications and can rule out effects of meaningful magnitude. A supplementary analysis finds little overlap between the two programs’ recipient populations: only 28% of SSDI awardees had any labor force attachment in the prior calendar year, and of those, only 4% received UI.

 

Social Security Disability Insurance Program Worker Experience, Zayatz, T. (2011). Social Security Disability Insurance Program Worker Experience. Actuarial Study, 122.

Understanding the increase in disability insurance benefit receipt in the United States, Liebman, J. B. (2015). Understanding the increase in disability insurance benefit receipt in the United States. Journal of Economic Perspectives, 29(2), 123-50. The share of working-age Americans receiving disability benefits from the federal Disability Insurance (DI) program has increased significantly in recent decades, from 2.2 percent in the late 1970s to 3.6 percent in the years immediately preceding the 2007-2009 recession and 4.6 percent in 2013. With the federal Disability Insurance Trust Fund currently projected to be depleted in 2016, Congressional action of some sort is likely to occur within the next several years. It is therefore a good time to sort out the competing explanations for the increase in disability benefit receipt and to review some of the ideas that economists have put forth for reforming US disability programs.

Health insurance coverage and the disability insurance application decision, Gruber, J., & Kubik, J. (2002). Health insurance coverage and the disability insurance application decision (No. w9148). National Bureau of Economic Research.

The Sale of Credit Life Insurance: The Bank as Fiduciary, Budnitz, M. (1984). The Sale of Credit Life Insurance: The Bank as Fiduciary. North Carolina Law Review, 62(2), 295.

Consumers and credit disclosures: credit cards and credit insurance, Durkin, T. A. (2002). Consumers and credit disclosures: credit cards and credit insurance. Fed. Res. Bull., 88, 201. Under the Truth in Lending Act, the Federal Reserve has the responsibility for writing the implementing rules, which it has carried out with its Regulation Z. Because this law is so critical for federal consumer protection policy in the credit area and because it imposes significant compliance costs on creditors, questions have been raised about consumers’ use of the protections inherent in Truth in Lending. Even though measurement of the precise effect of particular disclosure requirements on credit-use behavior or competition is problematic, one can study consumers’ reports of their views about marketplace information conditions and their uses of required disclosures. To this end, the Federal Reserve Board and others have periodically sponsored and analyzed consumer surveys on disclosure matters since 1969, when the original act was implemented. In this article, the results of two surveys undertaken in 2001 of consumers’ opinions about information availability are examined in the context of the earlier survey findings. The new data focus on consumers who use two, sometimes controversial, financial products–credit cards and credit insurance.

Consumer Installment Credit Insurance, Mors, W. P. (1956). Consumer Installment Credit Insurance. Ins. LJ, 299.

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