When you borrow money from a lender or bank, you commit to paying it back over time. However, life can be unpredictable, and unforeseen circumstances like disability or unemployment can make it challenging to meet those payments. That's where loan insurance comes into play. It's a safety net that steps in to cover your monthly loan payments for a specified period if you're unable to do so yourself. But with various policy options available, how do you know which one is right for you? In this blog, we'll explore the different types of loan insurance and how to choose the best option for your needs.
What is Personal Loan Insurance?
Insurance for personal loans is a safety net that ensures you can manage your loan commitments even during unexpected situations. Also known as loan cover insurance, it protects you against events that could affect your ability to repay the loan or burden your family with repayment responsibilities if something happens to you.
A loan insurance policy covers risks like:
- Loss of income
- Critical illness
- Disability
- Death
These policies offer benefits such as flexible payment options and customisable coverage to suit your needs. Typically, lenders give you the option to buy a loan insurance policy when your loan is approved. Ultimately, the choice to get extra protection is up to you.
How Does Loan Insurance Work?
Loan protection insurance helps the borrower repay the monthly loan payments for a predetermined amount of time, usually between 12 and 24 months. This is decided based on the loan amount and the type of policy chosen by the borrower. These policies are for people between the ages of 18-65, who are employed at the time of purchase of the policy.
To qualify, the individual must be employed for a minimum of 16 hours per week or be self-employed for a specified period. Loan protection insurance provides coverage for personal loans, home loans, car loans, credit cards, etc.
There are two main types of insurance policies, known as a standard policy and age-related policies. For either of the policies, the individual has to pay a specific premium amount with the assurance of availing the benefit of the policy as a policyholder during times of unemployment or disability. Some insurance companies also provide death benefits to their policyholders.
Benefits of Personal Loan Insurance
-
Loan Security:
Personal Loan cover offers security by lowering the outstanding loan amount if the borrower experiences:
- Accidental death
- Job loss
- Temporary disability
-
Financial Support:
Insurance plans provide financial assistance to your family during difficult times by relieving them from the burden of monthly EMIs.
-
Tax Advantages:
Certain loan insurance plans provide tax benefits eligible for deductions under Section 80C of the Income Tax Act, 1961.
-
Return on Investment:
Depending on the insurer, some loan insurance policies may include a money-back option, where you receive a predetermined amount at the policy's conclusion.
How Are Premiums Decided For Loan Insurance?
Premium is the amount to be paid by the policyholder for signing up for the loan protection insurance policy, just like for any other insurance. The premium amount varies from bank to bank and from one insurance company to another. It depends on a few factors, such as
- Loan Amount: here is a direct relationship between the loan amount and premium. If the loan amount is high, the premium to be paid is also high.
- Repayment Period/Tenure: If the tenure of the loan is long, the premium to be paid is high.
- Age: The premium is higher for older individuals when compared to younger individuals because it is considered that the younger individuals tend to make fewer claims as they are more likely to be employed and in the pink of their health.
- Health: The premium amount to be paid is higher for individuals with poor health because the likelihood of claims is higher during that period.
What Are the Different Types of Loans Insurance?
There are mainly two types of loan protection insurance policies. They are as follows
-
Standard Policy
The standard loan protection insurance policy does not take into account the policyholder’s age, gender and occupation. The policyholder can determine the amount of coverage they want with the maximum coverage period being 24 months. This type of loan insurance is widely available with most loan providers. Also, the loan insurance does not pay until after the initial 60 day exclusion period.
-
Age-related Policy
The age-related loan protection insurance policy takes into account the age of the policyholder and the amount of coverage they want with the maximum period of coverage being 12 months. Younger individuals are usually quoted with lower premiums because of their likelihood of making fewer claims. Older individuals are more likely to make claims because of deterioration of health and unemployment.
With this knowledge of the types of loan insurances and their differences, it is important to choose the policy which best fits you and to read all the terms, conditions and exclusions before making the decision.
What are the things to check before applying for loan insurance?
It is important to ask yourself a few questions and have a checklist before applying for loan insurance as follows:
- The total cost of the insurance over the tenure period: This is important because even though the monthly premium might appear to be a small amount, it eventually adds up over the term of the tenure period.
- The insurance policy’s terms, conditions and exclusions: This is essential because not all loan insurance policies cover all diseases. If you are faced with a health condition that is not covered under your policy, there will be no benefits whatsoever of the policy during that event.
- Benefits received: This is because many policies cover for a maximum of one year and for credit cards, only the minimum amount is covered for a certain period.
- Do you have to pay the insurance upfront: Some policies add the insurance amount to the loan amount and this makes the policyholder pay interest not just for the loan amount but also for the insurance.
- Employer benefits: This is important because some policyholders might not even need this type of insurance because many employees are covered through their job and they are provided with disability and sick pay for an average of 6 months.
- Make sure you qualify to submit claims and be well-informed before signing the contract.
FAQs
-
How much is insurance on a loan?
The insurance provided on a loan depends on various factors such as the loan amount, the type of policy chosen (standard or age-related), the insurance company, etc.
-
What is PPI coverage?
PPI is Payment Protection Insurance, mainly used in the US. It is the same as loan protection insurance. PPI coverage refers to the period of monetary support provided by the insurance policy to repay the monthly loan payments during times of unemployment or disability of the borrower.
-
Do we have to buy PPI coverage?
This is a decision that has to be made after going through a checklist of questions mentioned above and after careful reading of the terms, conditions and exclusion of the insurance policy. After thorough research and based on personal needs, the policy most suitable to the borrower’s situation should be chosen.
-
What happens if I cancel my Personal Loan Insurance?
If you cancel your Personal Loan Insurance, you won't have coverage anymore if something happens to you. You'll still need to repay the loan, even if you become disabled or pass away.
-
Is insurance mandatory for personal loans?
No, insurance isn't required for a personal loan. But it's a good idea to think about getting insurance because it can help protect you and your family in case something unexpected, like death or disability, occurs.
