Credit insurance covers businesses and an individual’s family members against losses resulting from the inability to repay a loan. A credit insurance policy usually provides a security cover for a specific reason for which a borrower defaults.
Credit Insurance: Types
Broadly speaking, credit insurance can be of two types, namely trade credit insurance and credit life insurance.
Trade Credit Insurance: This credit insurance policy is a credit risk management product for businesses, and hence is also known as business credit insurance. Through this insurance, one can secure protection against losses resulting from the nonpayment for goods or services delivered to clients. This policy lists the buyers of a policyholder and the insurance company pays the policyholder an agreed percentage of invoices or account receivables that are left unpaid by any of the buyers in this list in the event of insolvency, bankruptcy or extended default. Only business entities are eligible for this type of insurance. This policy can cover both domestic and export businesses.
Credit Life Insurance: Whenever a person purchases a big-ticket item, such as a car, s/he might need to take a loan for a specific period. Since injuries and death are unpredictable, there is no guarantee that the person will be able to repay the loan. In case of untimely death, the entire burden of loan repayment falls on the surviving members of the family. Credit insurance ensures that the surviving family members are not burdened by loan liabilities in case of the policyholder’s death. The policy ensures that the lender receives the rest of the loan amount.
Trade Credit Insurance: Additional Information
The premium for trade credit insurance is calculated on a monthly basis and is generally taken as a percentage of either sales or outstanding receivables for that month. This insurance covers the risks associated with insolvency, nonpayment of bills (should be undisputed), preferential payments, transfer of assets, work-in-process, contract frustration, inconvertibility of the buyer’s currency, embargo, war and natural disasters.