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What Is Debt Protection?

Sarah Edwards | February 10, 2024

Sarah Edwards
Legal Expert
Sarah Edwards, BS

Sarah Harris is a professional researcher and writer specializing in legal content. An Emerson College alumna, she holds a Bachelor of Science in Communication from the prestigious Boston institution.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: You don’t take out a loan or other debt with the intent of defaulting on it. However, life events outside of your control can make it impossible to repay as planned. Debt protection is a financial service that covers or cancels your loan payments under specific circumstances, such as unemployment or illness.

Imagine you’re finally taking charge of your credit card debt with a debt consolidation loan. You’ve just gotten a new job that makes it easy to make your monthly payments.

However, things don’t go as planned. Several months after you take the job, your company goes under, leaving you with no source of income. Even though you’re sure you can find a new job in a few weeks, it will be a month or so before you get a paycheck — and you’re still stuck with that monthly loan payment.

What if there were a way to make sure you could still afford your payments even if you lost your job, suffered an injury, or were otherwise left unable to pay? Fortunately, there is. It’s called debt protection.

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What is debt protection?

If you’ve ever had to take out a loan, the lender may have asked whether you wanted a debt protection plan. A debt protection plan allows you to cancel your loan payments — and sometimes even cancel the entire balance of your loan — in the case of death, disability, unemployment, or other covered events.

This kind of coverage protects your financial and mental health. When you have debt protection, you don’t have to worry about falling behind on bills as you recover from an injury or search for a new job. This kind of protection also safeguards your credit score. There’s no credit penalty if you have to use your debt protection, so your score will stay the same.

It’s important to note that while debt protection sounds like insurance, it technically isn’t. It’s simply an agreement between you and your lender.

Do you have old debt that’s gone to collections? Request a debt validation before you make any payments on the account.

How much does debt protection cost?

The exact cost of debt protection varies depending on your lender. However, in many cases, it costs about $1–$2 per month for every $1,000 in outstanding debt. This means that debt protection isn’t just affordable; in most cases, the cost actually goes down over the life of the loan.

To see how this works, let’s consider an example of debt protection.

Zeke takes out a $10,000 personal loan. He’s worried he’ll have trouble paying if he loses his job, so he decides to get debt protection. Zeke’s lender charges $2 per month per $1,000 outstanding balance, and Zeke pays $1,000 per month on the loan. Without factoring in interest and other fees, here’s how much Zeke would pay per month:

  • Month 1: $10,000 outstanding (at the start of the month), $20 debt protection charge, $1,000 loan payment.
  • Month 2: $9,000 outstanding (at the start of the month), $18 debt protection charge, $1,000 loan payment.
  • Month 3: $8,000 outstanding (at the start of the month), $16 debt protection charge, $1,000 loan payment.
  • Month 4: $7,000 outstanding (at the start of the month), $14 debt protection charge, $1,000 loan payment.
  • Month 5: $6,000 outstanding (at the start of the month), $12 debt protection charge, $1,000 loan payment.
  • Month 6: $5,000 outstanding (at the start of the month), $10 debt protection charge, $1,000 loan payment.
  • Month 7: $4,000 outstanding (at the start of the month), $8 debt protection charge, $1,000 loan payment.
  • Month 8: $3,000 outstanding (at the start of the month), $6 debt protection charge, $1,000 loan payment.
  • Month 9: $2,000 outstanding (at the start of the month), $4 debt protection charge, $1,000 loan payment.
  • Month 10: $1,000 outstanding (at the start of the month), $2 debt protection charge, $1,000 loan payment.

Over the life of the loan, Zeke only pays $110 for debt protection. That’s a small price to pay to ensure you don’t get stuck with $10,000 you can’t repay.

Some events are covered under a debt protection plan

Most forms of debt protection offer five types of coverage: death protection, short-term disability, long-term disability, short-term involuntary unemployment, and long-term involuntary unemployment. While different lenders may have different terms, here’s a general idea of what is typically covered under a debt protection plan:

Death protection

In some cases, if a borrower dies while they still have an outstanding loan, their family will be held responsible for the balance. Death protection is designed to erase your loan balance if you pass away while still repaying.

Short-term disability

This kind of coverage steps in if you are injured or otherwise unable to work for a short period. It generally allows you to cancel several payments (usually no more than 12) with no penalty.

Long-term disability

This coverage protects you if you have a long-lasting injury or disability. It usually lets you cancel more payments than short-term disability coverage, and it sometimes has higher coverage maximums, too.

Short-term involuntary unemployment

If you get fired, laid off, or otherwise lose your employment (without voluntarily quitting), this coverage will usually let you skip a few months’ worth of payments. That gives you time to search for a new job.

Long-term involuntary unemployment

This coverage sometimes lets you skip more payments than short-term involuntary unemployment coverage. It also tends to have higher coverage maximums.

If you have old loan debt you still need to pay off, you might be able to settle your debt for less.

Should you get debt protection?

When it comes to finances, it’s almost always better to be safe than sorry. And given that debt protection is typically very inexpensive, it’s almost always a good idea to purchase it when you get a new loan. Should anything unexpected happen, your future self, and maybe even your family members, will thank you.

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