What is a Loan Insurance?
Life is unpredictable. This is why insurance products exist, to protect individuals financially in the event of unexpected tragedies. While popular insurance products are generally life insurance and health insurance, there exists another product to help individuals tide over financially and this is loan insurance or personal loan insurance plan. As the name suggests, this product essentially acts as insurance against unpaid loans and helps customers repay their personal loans or other loans in case of unexpected events such as accidents, health concerns, disability, unemployment, or even death.
Instead of pushing the burden on the borrower’s family, availing a personal loan insurance plan ensures that the loan is repaid while adhering to all the terms and conditions set by the lender. Therefore, loan insurance schemes are designed to safeguard not just the borrower but also dependents from facing the liability of an unpaid loan. If the borrower is covered, the insurance provider repays the outstanding amount to the lender if the borrower is unable to.
How Does Loan Protection Insurance Work?
Insurance plans are designed to protect the policyholder financially and loan insurance schemes work similarly. The borrower must avail of the insurance plan, pay premiums either upfront in the form of a lump sum or through EMIs for a specific period of time. As is the case with most insurance plans, the premium to be paid will vary on a case-to-case basis and depends on factors such as the age of the individual, income, gender, loan amount borrowed, etc.
Features of Loan Insurance Plans
Some of the important features governing loan insurance plans are as follows:
These loans can be procured for individuals as well as for groups depending on the provider
Loan insurance plans generally cover death, disability, unemployment, and in some cases critical illnesses as well. It is up to the individual to decide what features are best suited for his/her requirement
Additionally, co-borrowers, if any can also be covered under the plan
As mentioned previously, the premium amount can be paid in the form of a lump sum or can be paid through EMIs. If the loan amount is high, then the amount of premium to be paid is also high. This is also applicable for longer repayment tenure, older applicants, and those with relatively poor health.
Coverage is provided in two variants. The first is when the premium amount remains the same throughout the entire policy term and the second is when the premium amount decreases with each year.
Benefits of Loan Insurance Plans
The most obvious benefit of a personal loan or other loan insurance plans is in the event of the borrower being unable to repay the loan due to unfortunate circumstances; the insurance policy will ensure that the loan is repaid. The burden does not fall on the borrower’s dependents. Additionally, since most of these policies also cover co-borrowers, the burden is lifted off of them as well.
Most individuals purchase insurance plans not just for the protection that they offer but also because tax benefits are provided. Similarly, with loan insurance plans, policyholders can avail a deduction under Section 80C of the Income Tax Act. Certain policies also offer additional benefits at the end of the policy tenure.
Some of the popular loan insurance plans are the Rinn Raksha Group Plan by SBI Life, Group Loan Protect Plan by ICICI Prudential Life, and Loan Suraksha Group Plan by Future Generali.
Things to Consider Prior to Opting for a Loan Insurance Plan
Before deciding on a loan protection insurance policy, there are certain factors that individuals must keep in mind in order to maximize the benefits while reducing the risks. Some of these include:
Buying a loan insurance plan is not mandatory. This can be availed as an additional protection cover but it is not compulsory at all.
- While a loan insurance plan can guarantee financial security, it is up to the individual to decide to opt for it or not
As is the case with most loan insurance policies, the coverage varies from plan to plan. Individuals must therefore check the plan thoroughly; ensure that all the necessary coverage is provided.
- For e.g. certain plans may only cover accidental death, or some plans only unemployment or disability. The more comprehensive the plan is, the better it is for the policyholder.
- Additionally, comparing different policies are also beneficial. Certain insurance plans may also require medical check-ups.
Individuals must ensure that they can afford to repay not just the loan but also pay the premium for a loan insurance policy if they decide to purchase one. A foreclosure is an option that can be explored as well but only after thoroughly reviewing all the terms and conditions.
A loan insurance plan may be more of a niche product as compared to certain other insurance plans but it comes with its own unique benefits. Individuals must procure this plan only if it will benefit their financial status as it can remove the loan repayment burden from their dependents in case of unfortunate incidents