Loan insurance (or loan payment protection insurance to give it its full title) works in a very simple and straight forward way. It provides a tax free monthly amount that will be used to meet any monthly loan commitment in the event that you become unable to work because of an accident or sickness, or due to being made involuntarily unemployed.
How does it differ from income payment protection insurance? Unlike income payment protection insurance, which provides a regular monthly payment which can be used just like an earned income and completely at your own discretion, loan payment protection insurance is debt specific. The benefits payable are earmarked or "ring-fenced" for the specific purpose of meeting your monthly loan repayment.
How much of my income can I cover in this way? Typically, this type of insurance can be used to cover up to 50% of your normally earned income, or £1,500 a month, whichever is less. Policies differ, however, and these limits may vary from insurer to insurer.
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