Jan 25, 2023 / Reading Time: Approx. 5 mins
Listen to What Is Loan Protection Insurance? Should You Buy It?
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Availing of loans nowadays is child’s play, thanks to innovations in finance and technology! Earlier, when people had to stand in a long queue at the banks, arrange hundreds of documents, convince the guarantor, complete the long and tiring loan process, and pray for the loan to get approved, the number of people used to avoid taking loans was higher. But, since availing of loans has become extremely quick and easy these days, living on credit has become a norm.
We have to opt for loans several times in our lifetime for financial emergencies like medical treatment or to fulfil our financial goals, such as a child’s higher education, a child’s wedding, and buying a home, among others. Due to easy access to credit, people do not think twice when availing of a loan and tend to borrow more often than needed.
However, as we all know, life is uncertain and unpredictable. While you may be able to comfortably repay your monthly instalments today, there might arise certain situations in the future due to which you are unable to repay the dues on time. There could be several situations, such as a medical emergency, job loss, disability, loss of an earning member in the family, and so on.
In such a challenging situation, Loan Protection Insurance can be a simple answer. This article elucidates everything you need to know about Loan Protection Insurance and helps you decide whether you should buy it.
How does Loan Protection Insurance work?
Loan Protection Insurance helps the policyholders (borrowers) by providing financial support when they are incapable of repaying the loan amount due to unemployment or disability. Some policies also cover the death of the policyholder. It repays their dues for a certain period and protects them from loan default.
Here are the key features of Loan Protection Insurance:
Loan Protection Insurance helps the insured by making loan repayments for typically 12 to 24 months. This period is pre-specified based on the loan amount and the insurer.
The Loan Protection Insurance policies are offered to borrowers between the ages of 18 to 65 years, provided the borrower is employed at the time of purchasing the insurance policy.
It provides coverage for all types of loans, such as personal loans, car loans, home loans, education loans, credit card dues, and so on.
Depending upon the type, the policy may offer tax deductions under Section 80C of the Income Tax Act, 1961.
While Loan Protection Insurance mainly covers disability and unemployment, many policies also provide death benefits to the nominee.
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What are the types of Loan Protection Insurance?
1. Standard Loan Protection Insurance Policy:
This type of Loan Protection Insurance is widely available with most lenders. The premium of the Standard Loan Protection Insurance Policy does not consider the policyholder’s age, gender, occupation, etc. This common type of Loan Protection Insurance provides coverage determined by the policyholder with a maximum period of 24 months. Besides, it comes with a 60 days initial exclusion period.
2. Age-related Loan Protection Insurance Policy:
Not many lenders in India offer Age-related Loan Protection Insurance policies. The age of the policyholder and the amount of coverage they want (with a maximum period of coverage being 12 months) determine the premium of the policy. Similar to life insurance policies, since young adults are likely to make fewer claims, they are quoted with lower premiums. On the contrary, older individuals are usually quoted with higher premiums as they are more likely to make frequent claims due to the deterioration of health and unemployment.
What are the factors that determine the Loan Protection Insurance premium?
While the Loan Protection Insurance premium varies from insurer to insurer, it typically depends upon these three factors:
1. Loan amount: The loan amount is the primary factor determining the policy premium. The higher the loan amount, the higher will be the premium.
2. Loan tenure: If the loan tenure is higher, the policyholder is likely to be quoted a higher premium as the insurer will take the risk for a longer period.
3. Age and health: As discussed, Age-related Loan Protection Insurance takes into account the policyholder’s age and health conditions. Higher age and poor health conditions will likely increase the policy premium.
Should you opt for a Life Insurance Policy instead?
As you might be aware, life insurance offers financial protection to the policyholder’s family (nominee) in case of the policyholder’s unfortunate demise. If the policyholder has left any loans behind, the nominee can clear them off from the amount received from the life insurance claim.
However, take note that unless your life insurance policy clearly specifies or you have bought the related add-on, life insurance does not cover disability and unemployment. Needless to say, Loan Protection Insurance Policies are cheaper than Life Insurance Policies as they offer higher coverage for an affordable premium. Hence, buying a Loan Protection Insurance Policy is best to ensure your loans are repaid in case you are incapable of repaying them in the future.
What are the things to consider before buying a Loan Protection Insurance policy?
Lenders usually add the Loan Protection Insurance premium amount to your loan amount. While you do not have to pay the amount immediately, it gets added to your principal loan amount and the lender charges interest on it. Therefore, it makes sense to pay the amount separately in cash. Furthermore, if you are paying the premium for the entire loan tenure, the insurer may offer you a discount on the premium, thus saving a considerable amount of the premium.
While many lenders offer Loan Protection Insurance for a maximum of two years, you should check with the lender/insurer the exact period your loan will be covered for.
Like any other insurance policy, Loan Protection Insurance Policies also come with sets of inclusions, exclusions, and terms & conditions. Before buying the policy, make it a point to check all the terms & conditions, the list of inclusions, and the list of exclusions.
Should you buy a Loan Protection Insurance Policy?
Loan Protection Insurance provides financial protection to cover your loan for a pre-specified period in case of a disability, unemployment, or sudden death of the policyholder. In an unfortunate event, if you get a permanent or temporary disability, lose your job and can’t find the new one immediately, or lose your life, it can be challenging for you/your family to take care of your unpaid dues.
High-cost loans like personal loans and credit card dues and large amount loans like home loans and car loans can create financial stress if not repaid on time as they can accumulate a large amount in a short duration that may become a financial burden. However, by paying a small amount of premium, you can cover your loans from such unforeseen incidents with Loan Protection Insurance.
If you have a huge loan burden that you do not want to pass on to your family in case you are incapable of repaying, you should buy a Loan Protection Insurance Policy. It will also ensure your life insurance benefits are passed on to your family and no creditor claims for them for the unpaid dues.
KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.
