What is Loan Insurance? – Decoding Insurance

Have a home loan or personal loan or car loan? Repaying it regularly? Fine! What’s the contingency plan for loan repayment in your absence or inability to pay? Take a Loan Insurance and pass on happiness not liability…
Getting loan is lot easy these days. Whenever I open my mailbox, there are at least half a dozen banks willing to loan me fund. I am not sure though how smooth the process will be once I really apply for one. With RBI base lending rate sliding down with almost ever quarterly review and banks base rate being linked to Marginal Cost of Funds based Lending Rates (MCLR), loans are becoming affordable with every passing day. On top of this are long repayment options and step up/ step down installment facilities. Reaping the benefit, everyone is buying home or car early, going on that dream holidays or having an extravagant family celebration by lending from the banks, NBFC and other lenders. But what if one dies, is disabled or loses the job before repaying the loan? The loan liability falls on the heirs, estate or dependents, with maybe no matching income. Loan Insurance, if done earlier, may come to a rescue then.

Why Loan Insurance?

Loan Insurance is not insuring your loan against non-payment, but insuring your inability to re-pay the loan. That inability may be due to death, disability, major illness or loss of regular job. All these can be covered by separate insurance products; term life insurancepersonal accident insurancecritical illness insurance and job-loss insurance extensionThen why a specific product? Because, Loan Insurance is for the specific purpose of protection of the financial liability of the loan without any intention of making good other losses suffered due to death or disability. Its tenure will match the loan tenure and value will depend on the amount of loan availed. That means, cover period for a personal loan insurance shall be maximum 5-6 years while that of a home loan insurance can be up to 30 years. Also, the value of insurance shall reduce depending on the principal pay out. All these make it easy on pocket and independent of other insured goals.

What is covered under the Policy?

A loan insurance is offered by both life and non-life insurers, with similar cover but under different cause of loss.

Risk Non-life Insurance Life Insurance
Death Death cover of Personal Accident Life cover of Term Life Insurance
Disability Disability cover of Personal Accident Personal Accident Insurance rider
Major Illness Critical Illness Insurance Critical Illness Insurance Rider
Job-loss Ext As a benefit pay out, few months EMI (3-5 months) may be paid by insurer

Loan Protection Plans offered by banks bundled with various loans usually combines best of both worlds along with reducing sum insured matching the principal pay out.

Why Loan Accident Insurance if important?

  1. Loan Insurance makes sure that after your death, disability or inability to earn, the liability of the loan does not fall on your family.
  2. It is not meant for betterment of future, but only to pay off the loan.So the premium is lower compared to similar standalone products.
  3. If opted asLoan Protection Plan from the banks, premium is included in the loan amount. So you do not have to bear anything out front.
  4. There is normally no medical checkup required to opt for the policy.
  5. Even if you are already covered under a life, personal accident or critical illness insurance policy for a justifiable amount, it is always advisable to take a separate Loan Insurance policy.Otherwise, in case of an unfortunate event the insurance payout to the family shall be reduced by the amount of the loan outstanding.

Important points to note while opting

  1. Loan Insurance should cover all causes of death, including normal death.Cover only for death due to accidents may not be enough.
  2. Premium will vary depending on type of loan, tenure of loan and of course amount of loan.Insurance for Home Loan with longer tenure will entail more premium than that for Personal Loan of same amount but shorter tenure.
  3. Cancellation and refund in case of early pay-off or transfer of loan should be clearly understood before opting.
  4. In case of joint loan, both loanee should be adequately covered.
  5. It is always better to opt for Term Life Insurance with Critical Illness rider from a Life Insurer for the amount and tenure of the loan. And at the same time Personal Accident Insurance with EMI payment optional cover from a Non-Life Insurer for the same tenure and reduced amount.We shall discuss further in my next post.
  6. Remember that,premium for some sections of this policy (personal accident, EMI payment) is not eligible for any tax exemption.

So read widely and choose wisely.

Link to other blogs in the series:

  1. Decoding Insurance
  2. Health Insurance – Decoding Insurance
  3. Critical Illness Insurance – Decoding Insurance
  4. Top Up Health Insurance – Decoding Insurance
  5. Personal Accident Insurance – Decoding Insurance

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