Financial repayment insurance for your loans: 7 things you should know
Financial repayment insurance could keep you from falling further into debt if the worst happens. Here's what you should know.
If you haven't heard of financial repayment insurance, don't worry. I guarantee you're not alone.
Aside from being a bit of a mouthful, financial repayment insurance isn't the most commonly-known type of cover. But, for people with a loan and specifically those who rely on their salary to pay it off, it can come in handy.
If that sounds like you, keep reading because we've partnered with eric to bring you the 7 most important things you should know about financial repayment insurance.
Since we've partnered with eric for this article, we'll be using some examples from eric policies but you should always shop around and see what else is available. So, let's get into it.
1. It covers loan repayments
Financial repayment insurance can cover your monthly loan repayments if you're unable to work due to certain circumstances. We'll get to those later.
Some financial repayment insurance policies will only cover specific types of loan while others are more broad-ranging. For example, eric's policies will cover a loan from a registered Australian finance provider that requires regular monthly repayments.
That could mean a car loan, medical or personal loan or vehicle loan, all the way up to a home loan.
It won't cover any general living expenses though. If you need to claim, the insurer will deal directly with your lender so you won't actually see the money. You'll just be temporarily absolved of your payments since your insurer is covering them instead.
This works well for people who have the means to cover other general living expenses, even if they don't have a salary coming in. Perhaps you have an emergency fund, passive investments or a partner you can rely on.
2. It's triggered by your inability to work
Financial repayment insurance is only triggered in certain circumstances, primarily if you're too sick or injured to work for a decent stretch of time.
So, for example, you break your leg and are told by your doctor you'll be unable to work for the next 8 months. Luckily, you have financial repayment insurance to cover your mortgage and can focus on getting better rather than worrying about falling behind on your payments.
Some policies will also cover you if you have complications due to pregnancy which arise outside of your planned maternity leave.
However, there are exclusions to be aware of. No matter which insurance company you choose, you should always read the product disclosure statement (PDS) to check what they are.
Some common exclusions are deliberate self-harm, substance abuse or addiction and pre-existing medical conditions.
3. It may also be triggered by redundancy
In addition to illness and injury, some financial repayment insurance policies will include cover for redundancy, involuntary unemployment or if your own business becomes insolvent.
There are conditions to this cover though. You can't get sacked for poor performance or misconduct. It also won't cover situations where you're out of work due to the seasonal or intermittent nature of your profession.
So, let's say you're a freelance director engaged for 12 months to make a film. Your policy wouldn't kick in just because that contract comes to an end, as it was scheduled to do so.
Essentially, it has to be unexpected unemployment, which is through no fault of your own.
4. Benefits last a certain length of time
Financial repayment insurance doesn't pay out forever. There will be a time limit on how long the policy will cover your repayments, even if you're still unable to work.
For example, eric's financial repayment insurance policy covers repayments while you're unable to work, up to a maximum of 7 years.
That's pretty huge. Nationally, the median monthly mortgage repayment on an existing home is $2,489. In that case, if a policy holder suffered a major injury or illness which prevented them from returning to work at any point over the next 7 years, the policy could have covered $209,076 and potentially saved them from losing their home.
For claims as a result of involuntary unemployment or pregnancy complications, the financial repayment insurance will cover repayments for up to 6 months.
5. There are no-claim periods
Financial repayment insurance won't start covering your loan repayments as soon as you're unable to work. Instead, you have to serve a waiting period before benefits kick in.
With eric, the waiting period - sometimes known as the 'excess period' is 21 days. This means you will only be eligible to claim the benefit once you have been unable to work for 21 days.
In some cases, you may be able to bridge this gap by using personal leave, annual leave, savings or through financial support from friends and family.
6. Claims aren't impacted by benefits
If you've been unable to work for a decent stretch of time, you may be eligible for government benefits or, in some cases, Workers Compensation.
Financial repayment insurance won't impact those benefits in any way and your policy wouldn't be impacted either.
Why is this so important? Well, some alternatives to financial repayment insurance – such as income protection insurance – can clash with Worker's Compensation or government benefits.
For example, you may receive a reduced income protection insurance benefit if you're entitled to Workers Compensation.
Now, we're not here to even suggest which type of cover is more appropriate for you. That'll depend on your unique circumstances and specific needs. But it is an important point to consider when creating your financial safety net.
7. There are eligibility requirements
Finally, if you are interested in financial repayment insurance, you'll also have to check to see if you're eligible for cover.
Requirements will vary between providers but common criteria include being at least 18 years old, working for a certain amount of hours every week and being in stable employment.
You can check the product disclosure statement (PDS) and the Target Market Determination (TMD) of any product for eligibility and other specific requirements.
eric Loan Repayment Insurance. Keep up with your regular repayments, even if you're made redundant, suffer pregnancy complications, or become unable to work due to illness or injury.
*Financial Repayment Insurance is issued by Eric Insurance Limited ABN 18 009 129 793 AFSL 238279 (eric).