Posted in Finance, Accounting and Economics Terms, Total Reads: 303
Definition: Credit Insurance
It is a type of insurance policy purchased by a borrower. In the case of any catastrophic event like death, disability and the like, the insurance pays off any single, or at times, multiple debts of the borrower. This is usually to protect the family members from any difficulties after any mishaps. The borrower keeps paying certain amount as fee to the insurance company to reap benefits in the future.
Most of the times, the business is run on faith and payments are not made instantaneously but on a credit basis. Now if something happens to our customer or his business and he defaults, that is, he is not able to pay the money anymore, then the credit insurance comes as a help for us. The credit insurance which we applied for, pays the amount he defaulted and reduces our losses.
The overall cost of the insurance can turn out to be higher than what is the actual value for it. Hence when choosing a given policy, care must be taken to ensure that we do not over valuate the policy and end up paying more than what is required.