San Diego, CA - The new product being pushed on borrowers by lenders is known as debt protection, not to be confused with debt cancellation, the latter being closer to credit insurance of days gone by. The debt protection gives the subscriber certain leniencies in loan repayments, should a defined and protected event occur.

Articles have begun to appear in some banking, credit union, and credit card publications touting the benefits and profits associated with peddling of debt protection products to borrowers. When that happens, it's time for a closer look.
What is debt protection? A debt protection product is a two-party agreement between a lender and a borrower. They are considered optional loan products and are not regulated as insurance products.
 
The borrower pays the lender a fee and in return, the lender agrees to cancel, suspend or otherwise modify the terms of the loan agreement if certain, named events occur. This is usually handled as an addendum to the loan agreement and describes how the debt may be cancelled, suspended or otherwise modified. The agreement also describes the so-called triggering event, such as death, disability, involuntary unemployment, family leave or any number of other events. The lenders are liable for any costs associated with these products.

They are marketed under a variety of names such as Credit Guard, Debt Protect, Premier Credit Protection and First Protect among numerous others. The actual fee paid by the borrower is set by the lenders, however the average cost on several credit card agreements reviewed by the ICFE is $.85 per $100 of loan balance or $8.50 per thousand dollars of balance carried.
Here is how the industry describes their various product options.

Debt Protection Product -products offered in conjunction with lending to provide for the formal restructuring of debt when a protected event occurs.

Debt Cancellation Contract - Some or all of the debt is cancelled or forgiven. Examples include canceling the principal balance in the event of death, canceling the remaining loan balance if a vehicle is totaled, or waiving a monthly payment in the event of disability thereby canceling accrued interest and some principal.

Debt Suspension Agreement (also Debt Deferment Agreement) The accrued interest is cancelled and the loan balance is frozen when a protected event occurs. Once the protected event ends, the borrower will start repaying his or her loan from where they left off. This essentially extends the term of the loan without increasing the amount owed and without suffering any penalty on their credit report or score.

Payment holiday The contractual requirement to make a loan payment is waived. However, interest continues to accrue and no portion of the principal balance is cancelled, which then extends the loan term and increases the balance. The principal benefit of this low-cost product feature is that it protects against loan delinquency, thus protecting the member's credit rating.

Critical period benefits The benefits are limited to a maximum duration, or critical period, as defined in the debt protection product. For example, disability benefits may be limited to a maximum of 12 months. This approach provides benefits when they are most needed at a significantly reduced cost compared to credit disability insurance that provides a benefit for the remaining loan term.

Percentage wise, a borrower's chance of having a triggering event occur during the term of the loan is very low. Paying for the privilege of possibly suspending payments at some point in the future is not a good value. IF one is determined to purchase on some sort of protection, buy credit insurance, which makes the payments, and do not buy into debt suspension or debt cancellation agreements.

Lenders are starting to tailor their debt protection products to the markets they serve. Many sub-prime borrowers might feel more pressure to purchase these products, thinking it might positively influence the initial lending decision. The same is true with many sub-prime borrowers who are attempting to obtain a credit card, perhaps their first, perhaps their first after a bankruptcy.
The offer for credit protection is more prominent in the new card offers than the universal default clause, both of which should be avoided. It is another good reason why these types of fee-based, expensive credit offers with lots of conditions, hurtful to borrowers, should be first rejected and then shredded.