Get Next Level Protection With Loan Insurance

what is loan insurance

Naren is a 29-year old who had taken a personal loan for home renovation. However, during the repayment period, he lost his job and a lack of savings meant that he would have been unable to repay. But luckily, along with his personal loan, he had also taken a personal loan insurance plan. Thanks to this foresight, his loan was repaid on time and his credit score was also not affected.

Let us take a look at the importance of loan insurance plans, also known as loan protection policies.

What is Loan Insurance

An insurance plan is essentially a way to stay financially protected in case of unfortunate events such as the policyholder’s untimely demise, hospitalization, accidents, etc. 

There are various types of insurance plans offered such as term insurance, life insurance, health insurance, auto insurance, loan insurance, etc.

Loan insurance plan, as the name suggests, is a way to stay financially protected in case the borrower/policyholder is unable to repay a loan. This plan also safeguards the dependents of the borrower from the loan liability.

Features of Loan Insurance Plans

Given below are some of the salient features of loan insurance plans –

  • In case of unfortunate events such as loss of a job, untimely demise, accidents, etc., a loan insurance plan will reduce the liability of the loan on the borrower and his/her dependents
  • Premiums can be paid monthly or one lump sum depending on the plan as well as the policy provider
  • Depending on the plan chosen, the insurance provider will cover the repayments for a period of 12 to 24 months
  • Eligibility criteria will vary depending on the insurance provider but most will require the borrower to be employed for a minimum of a year, aged between 18-55 years, and have a steady income
  • While individual insurance plans are quite common, one can also get a group insurance policy
  • Insurance plans are availed for different types of loans such as personal loans, home loans, auto loans, etc.
  • Most policies also come with tax benefits under Sec 80C of the Income Tax Act

Types of Loan Protection Policies

There are different types of loan insurance plans available based on certain criteria –

  • Based on the type of loan taken such as personal loan insurance, home loan insurance, auto loan insurance, etc.
  • Based on the premium payment
  1. Reducing Cover wherein the premium decreases as the outstanding loan amount decreases during the tenure
  2. Fixed Cover wherein the premium amount remains the same throughout the tenure
  • Based on Eligibility
  1. Standard Policy wherein the policyholder’s age and occupation is not considered and is most commonly available 
  2. Age-Related Policy wherein the policyholder’s age and occupation will determine the coverage provided. For eg. older borrowers may have to pay a lot more for their desired coverage as the risk of defaulting is higher to income and health related issues

Is Loan Insurance Necessary?

is loan insurance necessary?

A loan insurance plan is not mandatory, however, the necessity will depend entirely on you. 

Life is unpredictable and it is always better to be safe than sorry. Having a loan insurance plan will ensure that your debt is repaid even if you can’t and the liability will not fall on your dependents.

Certain plans also offer a money-back policy where you may receive an amount at the end of the policy term. Additionally, you can also get tax benefits under Section 80C.

Things to Keep in Mind

things to keep in mind

  • A loan insurance plan is not mandatory but it can definitely be helpful if things go wrong
  • For a plan to be effective for you, it must provide cover against multiple circumstances such as untimely death, accidents, job loss, disability, etc.
  • You will need to check all the terms and conditions thoroughly before opting for a loan protection plan including the cover provided, hidden charges, etc.
  • While certain insurance companies do provide money-back options, the coverage in most cases will end once the loan is repaid
  • The premium for such insurance plans tend to be on the higher side and may impact your budget as you will have to repay the loan simultaneously as well
  • Your loan insurance plan can also protect your credit score in case you are unable to repay your loan

In Conclusion

Insurance plans are designed to provide financial protection in case of unfortunate events. While life, term, and health insurance plans are most popular, there are insurance plans for different types of loans as well. 

As is the case always, check the terms and conditions thoroughly before buying a loan insurance plan. While you are always advised to stay financially protected, it is not compulsory to invest in one. 

What are your thoughts about insurance plans? What policies have you invested in? Let us know in the comments below!