What does guarantor insurance cover?

When someone agrees to act as a guarantor for a loan, they take on the responsibility of repaying the loan if the borrower fails to do so. This financial commitment can be risky, especially if the borrower is unable to keep up with their payments. Guarantor insurance is a protective policy that offers peace of mind by covering some or all of the financial consequences a guarantor might face. But what exactly does this insurance cover?

Protection Against Loan Default

The main purpose of guarantor insurance is to cover the outstanding loan amount if the borrower defaults. When a borrower is unable to repay a loan due to job loss, business failure, illness, or other financial difficulties, the lender will turn to the guarantor for payment. If the guarantor has an active insurance policy, the insurer may step in to repay the debt—either in full or in part—depending on the coverage terms.

This means the guarantor will not have to liquidate their assets or take out another loan to settle the debt. It’s a crucial safety net, especially for those who have co-signed for large sums such as business loans, personal loans, or mortgages.

Coverage of Legal Costs

In some cases, the lender may take legal action against the guarantor to recover unpaid funds. Legal processes can be costly, time-consuming, and emotionally draining. Guarantor insurance may also cover legal fees associated with defending the guarantor in court or settling disputes between the lender and the borrower. This coverage helps reduce the financial burden and ensures the guarantor gets legal support if necessary.

Compensation for Losses Related to Collateral

If a guarantor had to provide collateral such as property or land when signing the agreement, and the borrower defaults, there is a risk of losing that asset. Some guarantor insurance policies can offer compensation if the collateral is seized or its value is reduced as a result of covering the loan. This is particularly relevant in countries like Kenya where property is often used as security in SACCO and bank loans.

Credit Score Protection

While not all guarantor insurance policies offer direct protection for credit scores, some advanced policies include services that help mitigate damage to a guarantor’s financial reputation. In the event of a loan default, a guarantor’s credit history can be affected. Certain insurers may offer financial counseling or credit protection services to help restore the guarantor’s financial standing after a claim is made.

Time-Limited Protection

It is important to note that guarantor insurance is typically valid for a specific loan agreement and has a defined period of coverage. This means the insurance will only cover defaults that happen during the agreed period and under specified conditions. If the borrower defaults outside this time frame, the guarantor may not be protected.

Exclusions and Limitations

While guarantor insurance provides valuable coverage, it is essential to understand that not all situations are covered. For example, if the guarantor fails to disclose important information at the time of applying for insurance, or if the borrower’s default is due to fraud or criminal activity, the insurer may reject the claim. Additionally, some policies may exclude coverage for loans considered extremely risky or for borrowers with a poor financial track record.

Author: Andrew Walyaula

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com