What Is An Insurance Guarantor? What You Need to Know!
An insurance guarantor is a third party who agrees to pay the bills if the policyholder cannot. They’re different from co-signers, and both the policyholder and the guarantor take on some extra financial risks. Technically speaking, your insurance company itself also has a guarantor, although this is a state-run institution rather than an individual. Let’s discuss the reasons why you might want an insurance guarantor, as well as some of the possible disadvantages.
How Does It Work?
Guarantors need to be able to speak to you openly about your financial situation. Because of the level of intimacy and trust involved, as well as the possible risk to their own credit score, guarantors are often spouses, parents, or other close relations to the policyholder. In the case of medical insurance, a guarantor is often responsible for taking the patient in for treatment, as well as paying the bills if they cannot.
Becoming or acquiring a guarantor is a legal decision with binding consequences. You can’t simply opt out of being a guarantor. If you’re a guarantor on a home loan, for instance, most times the homeowner will need to refinance their house in order to let you off the hook.
What Are the Different Types of Insurance Guarantors?
For individuals, there are two different types of guarantors: limited and unlimited. A limited guarantor only guarantees the loan or policy for a short period of time, or until a certain amount is paid. This portion of the loan is called a penal sum. Once it’s paid off, the guarantor doesn’t have any further responsibility. An unlimited guarantor, however, will remain responsible for the entire duration, or up to the total amount of the loan.
Did you know that your insurance company also has a guarantor? Every state has a guarantee system that will help pay policyholders in the event that their insurance company fails. All insurance companies are legally required to join the guarantee system in their state, which are all a part of the National Conference of Insurance Guaranty Funds. This helps ensure that policyholders won’t be completely left in the lurch. If the company fails, the guarantee system sells their assets and pays for customer policy claims in cash. However, there are limits per category, so it’s best to switch insurance companies if you sense yours may soon go under.
Where Is It Used?
People often desire to have an insurance guarantor if they’re uncertain they’re going to be able to meet the policy requirements or predict difficulty paying their bills. For example, someone with a debilitating illness such as cancer may wish to have someone close as their guarantor who can take over payments for the months they’re unable to earn money. This person is most often a spouse or parent.
In real estate or renting, a guarantor is more commonly used because the renter or buyer has a low income, bad credit, or doesn’t have a way to prove that they meet the minimum requirements. For example, even though a self-employed individual may make more than someone working a full-time job as an employee, most mortgage lenders typically won’t accept their income verification until they’ve been on the job for two years. However, some lenders will let potential borrowers acquire a guarantor or a cosigner so that they can secure the loan or lease.
Advantages of An Insurance Guarantor
For the policyholder, obtaining a responsible insurance guarantor assures them that they won’t lose their insurance policy if they can’t always make their payments. A parent, child, spouse, or special relation might seek this type of relationship as a way of making sure their physical and financial needs are met in the event of illness or extreme economic difficulty.
Disadvantages of An Insurance Guarantor
Although the policyholder takes on some risk by signing a guarantor, the guarantor assumes a much bigger responsibility. The only thing the policyholder has to lose is their policy and credit score if the guarantor doesn’t keep up their end of the bargain if their day of need arises. While that would be an intensely stressful situation, it doesn’t compare with the difficulties that would come for the guarantor. If you sign as a guarantor and then don’t keep up your end of the bargain, your credit score will drop, and you could go to court. In the case of a home loan, the guarantor may have their own house repossessed in order to keep their end of the deal.
Frequently Asked Questions (FAQs)
Is There a Difference Between a Cosigner and a Guarantor?
While the primary purpose of a cosigner and a guarantor is the same—legally promising to cover someone’s financial burdens if they aren’t able—they have a distinct legal difference. A guarantor doesn’t receive any benefits from the bills they’re obligated to cover.
For example, a guarantor for a car loan won’t be included on the title and doesn’t have any legal rights to the property. They’re merely a safety measure in the event the borrower can’t make the payments, and they can sometimes help the borrower secure a loan by their good reputation.
However, a cosigner may be listed on the policy or loan and may be entitled to the privileges therein. Technically, being a cosigner doesn’t automatically make you a co-owner, but some car insurance companies in particular, may require your name to be listed on the policy if you plan to be a regular driver of the insured vehicle, or if you live under the same roof as the policyholder.
What Are the Requirements for Becoming a Guarantor?
Every lending company has their own requirements for becoming a guarantor. However, in the United States, you must at least be 21 or older with a good credit score, to be determined by the company, and earn at least the minimal amount required to obtain the insurance policy or loan. Most lenders prefer homeowners with full-time jobs.
Should I Use a Cosigner or a Guarantor?
A guarantor agrees to cover you financially without assuming any other responsibilities. It’s still a legally binding relationship, however, and shouldn’t be entered into lightly since it’s difficult to dissolve. A cosigner also agrees to pay your bills in the event you can’t, but they may have a little more input in decisions made or be able to receive some of the benefits of the policy or loan. An example of a cosigner on an auto insurance policy might be a parent, spouse, or even older sibling who may want to drive the car every once in a while. Although there’s more of a legal separation between a cosigner and a guarantor, ultimately, their responsibilities are the same.
An insurance guarantor legally agrees to come to your rescue in the event you can’t pay your insurance bill. Given the extremely risky nature of this legally binding relationship, a guarantor tends to be someone close to the policyholder, such as a parent, child, or spouse. Both parties should carefully and candidly evaluate each other’s financial situation before agreeing to enter this type of relationship, as well as discuss how their overall relationship might be altered in the event that the guarantor is ever called to perform their role to avoid wrecking both parties’ financial statuses.
See also: Does Co-Signing a Mortgage Affect a First Time Home Buyer? Everything You Need to Know!
Featured Image Credit: Jumpstory
- 1 How Does It Work?
- 2 What Are the Different Types of Insurance Guarantors?
- 3 Where Is It Used?
- 4 Advantages of An Insurance Guarantor
- 5 Disadvantages of An Insurance Guarantor
- 6 Frequently Asked Questions (FAQs)
- 7 Should I Use a Cosigner or a Guarantor?
- 8 Conclusion