Loan insurance – What is it about and things to check before applying

A loan is a certain amount of money or debt borrowed by an individual from the lender or bank with the condition of paying it back through regular monthly payments. However, life as we know it is very uncertain and unpredictable, and there might arise situations due to which an individual becomes incapable of repaying the loan amount. This could be due to disability, unemployment or any such unforeseen event. In such situations, ‘loan insurance’ or ‘loan protection insurance’ comes into play. The insurance company pays the monthly loan payments for a specified period on behalf of the insurer. But how does one decide which policy to choose and at what cost? Are there different types of loan insurance? We will discuss the answers to all these questions in this blog.

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 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.

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

1. Loan Amount: There is a direct relationship between the loan amount and premium. If the loan amount is high, the premium to be paid is also high.
2. Repayment Period/Tenure: If the tenure of the loan is long, the premium to be paid is high.
3. 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.
4. 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 insurance for loans?

There are mainly two types of loan protection insurance policies. They are as follows

1. 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.

2. 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

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. Make sure you qualify to submit claims and be well-informed before signing the contract.

What is personal loan insurance and what are their benefits?

Personal loan insurance is the insurance taken to pay off a personal loan in times of unemployment, disability or accidental death of the borrower. Banks in India offer loan insurance to individuals to repay their personal loans, home loans, etc regardless of their ability to pay.

There are many benefits to personal loan insurance, such as

1. In the circumstances of an unfortunate event such as the accidental death of a borrower, sudden unemployment or disability, the personal loan insurance helps the borrower make monthly loan payments for a few months and decrease the outstanding loan amount.
2. During the above-mentioned unfortunate event, with the loan protection plan in place, the family of the borrower is not burdened to repay the loan amount immediately. It provides a buffer period for both the borrower and the family to recover from the unforeseen event.
3. Some loan insurance protection plans provide tax benefits under Section 80C.
4. Some loan insurance plans have a money-back offer, wherein the policyholder receives a certain amount of money at the end of the tenure period.

FAQs

• What is loan insurance and how does it work?
  Loan insurance is a protection plan for the loan taken by the borrower, who is also the policyholder of the insurance policy plan. In times of unforeseen events such as disability, unemployment or sudden death, the policy provides coverage for a certain amount of time and repays the monthly loan payments to be made.
• How much is insurance on a loan?
  The insurance provided on a loan depends on various factors such as the loan amount, type of policy chosen (standard or age-related), the insurance company, etc.
• What are the benefits of loan insurance?
  The benefits of loan insurance include coverage provided by the policy during unforeseen events such as unemployment, disability or sudden death, tax benefits under Section 80C, money back at the end of tenure period and removing the burden on the family to repay the loan during times of distress.
• 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.