If you are reading about loan insurance, then in all likelihood, you must have a fair idea about what a loan is. A loan is money that you borrow from a lender, typically a banking institution or any other financial institution. There is a condition to pay back a stipulated amount on a monthly basis; which is inclusive of interest along with the principle. These monthly repayments are called equated monthly instalments.
Why is loan insurance necessary?
If you have borrowed a hefty amount over the long term, especially for a need like buying a house, then it is customary to avail of loan insurance or loan protection insurance. The uncertainty and unpredictability of life have iterated the need to hedge the risk of leaving behind a huge debt for your family to fend for in the event of your eventuality. However, there may be other reasons for your inability to pay your EMI; which could range from disability, unforeseen events such as critical illness or even unemployment etc. The insurance company pays the EMI on your behalf for the specified period. The insurance is usually aligned to your loan itself; thereby the term of the policy will be the tenure of the insurance itself.
How does loan protection work?
These insurance policies help the borrower by enabling repayment of monthly instalments towards the loan for a predetermined period. This is during any event which leads to a sudden inability to pay the stipulated instalments. The insurance is aligned closely to the type of policy, loan amount and loan tenure that the borrower has availed.
You can avail of a loan protection plan if you are within the age group of 18 – 65 years. Most people are actively earning that point of time at the time of purchasing the policy. You can avail of the loan protection insurance for a variety of loans such as personal loans, home loans, car loans, credit card loans etc.
Additional Read: One may buy term insurance along with the home loan
Types of policies:
Two types of loan insurance policies are available:
- Standard policy and age-related policies: Both these policies require the individual to pay a premium with the coverage that provides the benefit of monthly premium payments in the event the policyholder ends up being unemployed or disabled during the tenure. Other insurance policies also provide the death benefit to the beneficiaries of the policyholders which you can use for effective debt management and other financial requirements.
Detriments for premiums of loan insurance policies:
The key detriments of these insurance policies are different from that of the other insurance policies:
- Loan amount:
This is one of the most critical aspects of the loan protection insurance policy. The entire coverage of the insurance equals the total loan amount. So, as and when you repay the loan, the outstanding loan amount diminishes over the tenure. Thus, even the coverage for the loan insurance plans would thereby reduce in line with that of the loan amount. If your borrowing is high, then the premiums would also be hefty.
Another critical aspect of the loan protection insurance plan is the loan duration. The insurance plan is also the same as the loan itself. In the event of pre-closure of the loan, you may choose to shut down your loan insurance or merely let it lapse. The quantum of premium is a combination of both loan amount and tenure. Thus, if your loan amount is large with a longer tenure, then your premiums may be relatively lower as compared to a large loan amount borrowed over a shorter tenure.
- Age and medical fitness of the borrower:
If the borrower is older, then the premium would be higher, and the chances of any untoward happening for an older person is more likely. Hence, the insurer assumes the risk element to be high. Based on this the premiums are directly proportional to the age and medical fitness of the borrower.
Joint holding of property and co-borrowers in loan:
It is often seen that a house is in the joint names of both spouses. Hence, they may be co-borrowers of the loan as well. Other assets such as a luxury car or any other asset could also be owned jointly.
Almost all types of loans including personal loans can be co-borrowed. In such cases, the loan insurance should also be in both names. Here is how loan insurance works in the case of joint / co-borrowers:
|Coverage for a respective share of the loan||Coverage for 100% of the loan amount upon first death basis|
|Death benefit||If any one of the co-borrowers were to meet unfortunate death; that person’s respective loan share as per the loan schedule is payable||In the event of the death of any one of the co-borrowers, the outstanding loan amount as per the loan schedule is payable. However, this is subject to the fact that provided both borrowers are insured for the entire loan amount,|
|Life cover for the surviving member||The life cover for the surviving member will continue for their respective loan share for the balance repayment term||The life cover will cease to exist for the surviving borrower|
Personal loan insurance:
Personal loans saw a rise in disbursement during the pandemic, as this was the easiest credit access for people who had lost their jobs. They are the go-to destination for individuals who face sudden and unexpected unemployment, disability or accidents. Availing of personal loan insurance will provide you with the following benefits:
- The insurer pays the monthly payments on behalf of the borrower for a pre-determined period.
- Provides a family with enough financial support to recover from the unforeseen period; the outstanding loan comes down by continued repayment of monthly payments for a certain period.
- Loan protection plans qualify for tax benefits under section 80C.
- Many of the loan insurance plans have started offering money-back as part of their policy features, under this the policyholder will receive a certain amount of money at the term of the policy.
It is quite apparent that loan insurance can come in handy during uncertain times, it is increasingly popular in home loans. Many banks offer it as a package where the loan and loan insurance are from different entities, often operating under the same parent group. It is always wise to compare the features of various plans and choose the one that offers maximum coverage for lower premiums. Remember to use SecureNow to conduct a thorough investigation of the policy features to choose the one that aligns best with your requirements.