Comprehensive Guide on Credit Insurance

Businesses and companies operate using credit, with purchases of raw materials and sales of finished goods typically occurring in bulk and on credit terms. Rarely do buyers make immediate cash payments for goods procured from businesses, opting instead to settle their debts over a predetermined timeframe. However, in the case of the buyer’s death or financial insolvency, questions arise regarding the settlement of the debts owed by the buyer.

In case of death, bankruptcy, or going bankrupt, businesses can suffer big money problems because they can’t make money from their sales. These problems can make the business’s financial situation weaker. That’s why there are credit insurance policies in the market. These policies help businesses when these bad things happen. Let’s learn what these policies are and how they help businesses.

What do you mean by Credit Insurance?

A credit insurance policy is like a safety net for businesses. It helps cover the risk of not getting paid by customers who owe them money. If customers can’t pay because of things like death, disability, or bankruptcy, the credit insurance policy steps in and pays what’s owed. This way, businesses can keep making money even when customers can’t pay. These policies are important because they stop businesses from losing profits due to unpaid debts.

What are the types of Credit Insurance?

Credit insurance policies are available for both businesses and individuals who take out loans. They come in various types, including:

Credit Disability Insurance

If the person who owes money becomes disabled and can't pay back what they owe, the insurance policy will help cover the repayment.

Credit Life Insurance

This policy protects against the risk of the person who owes money passing away. If the person dies before repaying their debts, the policy will cover the remaining debt.

Trade Credit Insurance

This policy is made for businesses and helps protect them from losing money because customers don't pay what they owe.

Credit Property Insurance

With this policy, the property used as security for the debt is safeguarded from theft, damage, or other losses.

Credit Involuntary Employment Insurance

If the person who owes money loses their job and can't pay back what they owe, the policy will help by covering the debt for them.

What Credit Insurance Plans Typically Include?

Credit insurance policies protect against two main types of risks: commercial and political risks. Here’s what each of these risks includes:

Commercial Risks

Commercial risks are when the buyer goes bankrupt or can't pay what they owe.

Political Risks

Political risks are problems caused by political situations, such as:

  • War, riots, revolution, rebellion, etc.
  • Any decision made by the government that stops payments from being made.
  • When the government of the country where the person who owes, money lives decides to temporarily stop repayments, it's called a "repayment holiday."
  • Any political events that stop payments from being made.
  • When the government, who is the buyer, doesn't pay.
  • When the buyer's city or country experiences natural disasters and they can't pay.
  • What isn't included in credit insurance?

    Credit insurance policies don’t cover situations where people don’t pay back their debts because of these reasons:

    • Nuclear perils
    • When someone buys things for personal use, not for business.
    • If someone has already paid before.
    • Losses due to changes in how much money foreign money is worth.
    • Trade disputes
    • Sales made with a Letter of Credit that can’t be changed.
    • When the buyer refuses to accept the goods.

    How does credit insurance function?

    To get credit insurance, a company asks a life insurance company for coverage. The insurance company agrees to cover part of the risks. This means they’ll pay for a percentage of the money the company is owed, usually around 70% or 80%. The company pays a fee, called a premium, for this coverage. If a buyer doesn’t pay what they owe and it’s covered by the insurance, the insurance company pays instead.

    Making a Claim Under Credit Insurance

    To get money from a credit insurance policy, you need to tell the insurance company right away if someone doesn’t pay you back. You have to fill out a form with information about what happened and give it to the insurance company. Sometimes, you might also need to report the problem to the police. The insurance company will then check everything and, if everything is okay, they’ll give you the money you’re owed.

    Documents required for credit Insurance Claims

    To get money from your credit insurance, you’ll need these documents:

    • Police FIR
    • Claim Form
    • Records that show how much money the person who owes you has.
    • ID Proof
    • Any additional documents that might be needed
    • Bank Details

    What are the Benefits of Buying Credit Insurance Plans?

    Credit insurance helps businesses that deal with credit risks. Here are some benefits:

    • The policy makes sure businesses get paid for the things they sell by covering what debtors owe.
    • Credit insurance policies reduce the amount of money businesses lose from unpaid debts and help them stay profitable.
    • Because businesses don’t lose money from unpaid debts, their worth in the market stays the same.
    • The policy gives financial protection to businesses that sell things on credit to people in India and other countries.

    Considering the benefits of credit insurance in India, it’s wise to invest in a quality policy to protect your business from credit risks. If your customers don’t pay what they owe, it could seriously harm your finances. Especially in the early stages, such setbacks could even force your business to close. A credit insurance policy is useful because it handles repayment risks, protecting your business from losses.