Personal Loan Insurance: Guide for Australians

Personal loan insurance is designed to help support your loan repayments if certain unexpected events affect your ability to pay, such as illness, injury, or job loss. While it’s often offered alongside personal loans, many Australians are unsure what personal loan insurance actually covers, how it works, or whether it’s required (it isn’t).

This guide explains what personal loan insurance is, the different types available in Australia, typical costs, common exclusions, and situations where it may or may not suit your circumstances. It also outlines alternative options that may help you manage financial risk and improve your overall financial literacy when borrowing.

What is personal loan insurance?

Personal loan insurance is an optional insurance product that may help cover your personal loan repayments if specific hardship events occur. It may also be referred to as:

• Personal loan protection insurance
• Credit insurance
• Payment protection insurance (PPI)

Unlike life insurance or income protection insurance, any benefit paid is generally directed to the lender to reduce or cover your loan repayments, rather than being paid to you or your family. The aim is to help keep your loan account up to date during certain covered events, subject to policy terms and conditions.

How personal loan insurance works

In general, personal loan insurance operates as follows:

• It is usually offered when you apply for a personal loan or shortly after approval
• Premiums may be paid monthly, upfront, or added to your loan balance
• If a covered event occurs, the insurer may cover some or all of your repayments for a limited period (often between 12 and 24 months)
• Cover is limited to your outstanding loan balance and does not provide additional funds beyond your loan obligations

The exact features and limitations depend on the specific policy.

Is insurance mandatory for personal loans in Australia?

No — personal loan insurance is not mandatory in Australia.

Under Australian consumer law, lenders are not allowed to:

• Require personal loan insurance as a condition of loan approval
• Offer better interest rates or loan terms only if you take insurance
• Decline your loan application because you choose not to take insurance

Important exception: secured loans

If a loan is secured (for example, a car loan or home loan), the lender may require the underlying asset to be insured. This is different from personal loan insurance because:

• The insurance protects the asset (such as a car or property), not your repayments
• You can usually choose your own insurer

If you feel pressured to take out optional loan insurance, you can decline the policy, ask for written confirmation that it is optional, or raise concerns with ASIC or AFCA.

Types of personal loan insurance

Personal loan insurance may be offered as individual covers or bundled together. Common types include:

Life insurance for personal loans

• Pays out the remaining loan balance if you pass away
• May help prevent debt being passed to your estate
• Suicide is often excluded for an initial period, such as 12 to 24 months

Total and permanent disability (TPD) cover

• May cover your loan if you become permanently unable to work
• Strict medical definitions usually apply
• Claims often require detailed medical evidence

Temporary disability cover

• May cover repayments if you are temporarily unable to work due to illness or injury
• Typically limited to a set period per claim
• Ongoing medical certification is often required

Involuntary unemployment insurance

• May assist with repayments if you are made redundant
• Usually excludes resignation, dismissal, or expected contract endings
• Waiting periods commonly apply

Critical illness insurance

• Covers only specific serious medical conditions listed in the policy
• Payment depends on meeting strict definitions and criteria
• Exclusions and survival periods are common

What does personal loan insurance cover?

Coverage varies by policy, but generally relates to specific defined events.

Covered events may include

• Death: outstanding loan balance paid to the lender
• Total and permanent disability: support for loan repayments or balance
• Temporary disability: short-term repayment assistance
• Involuntary unemployment: limited repayment cover
• Critical illness: only for listed medical conditions

What is commonly excluded

• Pre-existing medical conditions (often excluded for a period or permanently)
• Voluntary resignation
• Self-inflicted injuries
• Casual or contract roles ending as expected
• Loss of income for many self-employed workers
• Partial ability to work or reduced hours

Reading the Product Disclosure Statement (PDS) is essential, as exclusions and limitations are common.

Personal loan insurance costs in Australia

The cost of personal loan insurance varies and depends on several factors.

Loan-related factors

• Loan amount
• Loan term
• Outstanding balance and cover structure

Personal factors

• Age
• Health history
• Employment type
• Occupation risk
• Smoking status

Policy factors

• Type of cover selected
• Waiting periods
• Maximum benefit period
• Percentage of repayment covered

Cost example

For a $15,000 personal loan over five years, premiums may range approximately:

• Monthly premium: $35 to $60
• Total cost over the loan term: $2,100 to $3,600

If premiums are added to the loan, interest is generally charged on those premiums, which can increase the overall cost of borrowing.

Should I get personal loan protection insurance?

Whether personal loan insurance is suitable depends on your individual circumstances.

Potential benefits

• May provide reassurance during certain hardship events
• Can offer temporary repayment support
• May help reduce the risk of falling behind on repayments

Considerations and limitations

• Costs can be high relative to benefits
• Claims criteria are often strict
• Payout periods are limited
• Exclusions may reduce usefulness
• Alternative options may offer broader protection

Understanding both benefits and limitations can help you make a more informed decision.

Alternatives to personal loan insurance

Some Australians consider alternative ways to manage financial risk.

Term life insurance

• Often provides higher cover amounts for lower premiums
• Pays beneficiaries rather than lenders
• Can be used for multiple debts and living expenses

Income protection insurance

• May replace a portion of your income
• Payments are made directly to you
• Can be used for loan repayments and other costs
• Longer benefit periods may be available

Emergency savings

• No premiums or exclusions
• Funds can be used for any unexpected expense
• A common goal is three to six months of essential expenses
• Even smaller savings buffers can provide flexibility

Employer or superannuation benefits

• Group life insurance through super
• Income protection via workplace arrangements
• Salary continuance policies

How to approach personal loan insurance decisions

If you are considering personal loan insurance, it may help to ask:

• What events are covered and excluded?
• How long will repayments be covered for each claim?
• What is the total cost over the life of the loan?
• Can the policy be cancelled, and are refunds available?
• What documentation is required to make a claim?
• Are waiting periods involved?

It is generally helpful to read the full PDS, review existing insurance cover, compare alternatives, and consider whether the cost fits within your budget.

Looking for responsible lending? Meet Credit24

At Credit24, the focus is on responsible lending and clear information, so customers can make informed borrowing decisions. Optional insurance products are not required, and loan structures are designed to support manageable repayments.

Borrowers choose Credit24 for:

• Transparent pricing
• Fixed repayments to support budgeting
• Personal loans and lines of credit based on affordability
• Clear terms outlined upfront
• Support options if financial circumstances change

If you’re experiencing financial difficulty, early communication is encouraged and hardship options may be available.

Apply now

Sources

• Bankrate – Personal Loan Credit Insurance
• CAFII – Life Insurance for Personal Loans
• SoFi – Loan Protection Explained

Disclaimer

IPF Digital Australia Pty Ltd, trading as Credit24, ABN 59 130 894 405. Australian Credit Licence 422839.

The information in this article is general in nature and does not consider your objectives, financial situation, or needs. Lending criteria, fees, and charges apply. For product details, eligibility requirements, and full terms and conditions, visit www.credit24.com.au.