Almost every other adult in India has some form of debt or the other. Some of us might have taken a personal loan to fund a wedding, someone might've taken a home loan to construct his/her dream house, someone might've taken an education loan to study abroad. Whatever the reason might be, loans are extremely popular in the country, with certain organisations and individuals having debt to the tune of thousands of crores.
While we might not be under thousands of crores of debt, there would be a possibility that the loan amount is high, based on the individual's income. Now, we know what happens to the 'common' people who default on loans. Lenders send agents to recover the amount, often seizing the collateral in case of secured loans. If we are unable to pay even after this, they could go after our loved ones, turning our entire world upside down.
What is loan insurance?
Loan insurance or loan protection insurance, as the name implies, is an insurance cover which is taken for the loan. This can be understood by a simple example.
Say Mr. Jacob took a home loan of Rs.50 lakh, using this money to build a house. Given the loan quantum, he chooses to purchase a loan insurance. This loan insurance is taken for the loan amount,
i.e. Rs.50 lakh, protecting him and his family from any liability which arises out of his inability to repay the loan.
It is defined as an insurance which pays off any outstanding loan amounts under certain circumstances.
Why should you insure your loan?
Life is unpredictable, there are no two ways about it. Given this unpredictability, can we change the future of our loved ones on the basis of something taken by us? If anything were to happen to us, the lenders wouldn't forget the money they lent. This sum would still need to be repaid, with the onus of repayment often falling on our family.
Now, this can take a toll on the family, especially if the sole breadwinner was the one who took the loan. His/her passing away would not only impact the family's ability to continue with their normal way of life, it would also burden them additionally. As such, we wouldn't want to put them through this, making loan insurance a good option in certain cases.
Alternately, there could be instances where the borrower loses his/her job. This can impact the payment of EMIs. Under normal circumstances the lender would attach the collateral and try to recover the amount borrowed. In cases where the money was borrowed without collateral, the borrower might be subjected to immense trauma. A loan insurance plan provides protection under such circumstances. The insurer will handle the EMI repayment for a specific number of months, providing the borrower sufficient time to find another job.
The third instance where a loan insurance comes in handy is when the borrower meets with an accident/is diagnosed with an illness. The insurance policy will typically cover a number of diseases, based on the cover chosen. Alternately, if the borrower met with an accident which resulted in total and permanent disability, the policy would provide compensation which would take care of the outstanding loan amount.
Should you insure all loans?
The answer to this question goes beyond a simple Yes or No. Insurance for loan depends on factors such as the loan amount, the loan tenure, the financial standing of the borrower, etc. In case of loans involving a high quantum, say a home loan or an education loan, it makes sense to insure the loan.
Alternately, if the loan amount is not extremely high, say in the case of a personal loan, one can choose not to insure it.
It is imperative that one consider the cost of insuring the loan, for a certain premium needs to be paid for it. This premium depends on the age of the borrower, loan tenure, and the loan amount.
If one feels that the chances of anything happening during the loan repayment tenure are high, he/she should go in for an insurance cover, find bankbazaar home loan insurance here. A number of general insurance companies currently offer this in India.
While a life insurance policy is a must in today's world, most of us choose to ignore the other options provided by insurers. Only recently has the concept of health insurance picked up in the country. Another concept which could truly benefit us is loan insurance, ensuring that we leave behind no
liabilities for our loved ones.