The Benefits of a Personal Loan Insurance - Everything You Need To Know

 


Personal loans are a lucrative option during times of emergency. The commonest reason for this is that they can be used to meet multiple requirements without any restriction on the nature of their use. 


Initially, insurance coverage was available on other secured types of loans, such as home loans and auto loans. With smaller loan amounts and shorter tenures, personal loans did not generate concern for insurance and were not a profitable option for insurance companies.


However, insurance on personal loans is widely prevalent now with different schemes offered by various banks and insurance companies.

What is Personal Loan Insurance?

Personal loan insurance is insurance coverage on a personal loan that can be availed if the policyholder cannot pay the loan amount for a specific period under certain exceptional circumstances.


Usually, those exceptional circumstances include death, disability, or loss of the borrower's employment, which renders them seriously incapable of taking on loan repayment responsibility.


Under such circumstances, the insurance policy gets activated, which covers the borrower for a predetermined period according to the terms of the policy. Having a loan insurance policy ensures that the onus of repayment does not fall on the family members so that they are free of all liabilities. The personal loan insurance continues to pay off the outstanding loan amount and prevents the possibility of defaulting.

How Does a Personal Loan Insurance Work?

Personal loan insurance follows the exact mechanism of other insurance policies. 


Policies are priced at various rates, which are contingent on a number of factors. You can pay the premium upfront with a lump sum amount or periodically during your loan installment payment. 


Loan insurance plans vary with respect to their tenure, nature of circumstances, foreclosure period, etc. For example, some insurance plans may cover payment up to 24 months, but others for not so long. 


Even the exact nature of disability in the event of which insurance may be paid differs, depending on the company and the plan.


Make sure you go over the insurance policy terms very carefully and choose a plan that might be most relevant to your situation. All insurance plans have exclusions- pay extra attention to this section to be doubly sure that you can claim and benefit from the insurance if the need arises. 


If a situation covered in the loan materializes, the insurance will pay for the loan through the time mentioned in the insurance plan. In short:


  • Personal loan insurance safeguards the borrower from defaulting and frees their family members from the burden of debt if they cannot continue to repay the loan under some unforeseen circumstances.

  • The insurance premium can either be paid through lump sum or monthly installments.

  • The policyholder gets to decide the amount of coverage they would want at the time of the mishap.

  • The maximum time of coverage is from 12 months up to 24 months.

  • There is usually a 60 day exclusion period from the starting date of the policy, only post which period the insurance begins to pay

  • Carefully go through all the insurance clauses and exclusions before selecting a suitable plan for your social and financial condition.

Are there any Eligibility Criteria?

There are certain eligibility requirements needed to apply for loan insurance. 


Generally, policies are for people between 18 and 65 years with a full-time job under a long-term contract. If self-employed, individuals must have been in the field for a specified period. 


Individuals also need a certain minimum income and credit score to be eligible for an insurance policy. Read the eligibility criteria thoroughly before applying for a policy. Under the worst-case scenario, you might be denied insurance during the time of need because you are not eligible for it in the first place.


Sometimes, individuals might not be eligible for insurance if they are too old or suffer from a health condition. Even if they are eligible, premiums for such insurances might be higher than usual.

What are the Factors on Which Loan Insurance Depends?

Loan insurance depends on several factors such as loan amount, repayment tenure, age, and health conditions. The insurance premium amount has a proportional relation to most of these factors, which means:

  • The Premium amount will be higher on a larger loan amount.

  • The Premium amount will be higher on a longer tenure.

  • Older people might find it challenging to get coverage on a loan.

  • An existing health condition, especially one that is fatal or life-threatening, can make it difficult to get insurance.

What are the perks of Personal Loan Insurance?

All insurance policies are necessary for some genuine reasons, so they are present in the market with people availing them in plenty.


Similarly, there are a number of benefits of getting personal loan insurance that can act as a saving grace during times of crisis and prevent an already compromised situation from escalating further.


  • It prevents defaulting on the loan during times of duress.

  • The family member of the borrower is free from the burden of debt and loan repayment.

  • It helps maintain credit scores by ensuring timely repayment even during financial stress.

  • Some insurance plans provide additional tax benefits under Section 80C.

  • Some policyholders can avail of money-back plans on certain insurance policies where they receive some amount after completing the plan.

Are There Any Cons to Personal Loan Insurance?

Despite these benefits, there can be certain downsides to a loan insurance policy. The situation can pan out in a way such that you might not need insurance coverage at all. 


Of course, it is impossible to predict that no unfortunate situation might come your way in the future that might temporarily prevent access to income. However, if you have separate savings, they might cover for you for the time being. 


Similarly, a loan insurance policy becomes unnecessary if you have life insurance or other similar insurance policies that you can claim if such a situation arises. If you are a full-time employee at a company, you may be entitled to a few months' income even if an inevitable mishap were to prevent you from going to work.


Under such circumstances, an insurance policy becomes an excess financial responsibility not applicable to your situation.

Things to Remember Before Applying for Loan Insurance:

  • Getting loan insurance is never mandatory to get approval on loan. You can get insurance from a company different from which you are taking a loan or skip it altogether.

  • The insurance premium will entail an additional financial expenditure on top of your loan repayment. Rethink if you are ready to take on this additional financial responsibility or if you can comfortably go through the repayment without insurance according to your own calculations. 

  • Compare insurance schemes of different banks and companies before settling on a final policy. Choose a scheme most affordable for you.

  • Read the terms and conditions of the chosen scheme carefully before signing any document. Read the exclusions portion and see if they cover the scenarios that you are looking for. 

Conclusion:

Taking an informed decision is integral to making such crucial financial choices. Insurance is one such critical financial question that should be resolved cool-headedly. If you can afford it, taking insurance is always a wise option as it provides due safety against mishappenings and saves your family from liabilities.

Post a Comment

0 Comments