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Tata Capital > Blog > Safeguarding Your Finances: A Guide to Personal Loan Insurance

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Safeguarding Your Finances: A Guide to Personal Loan Insurance

Safeguarding Your Finances: A Guide to Personal Loan Insurance

Taking out a personal loan is an important financial decision that requires careful planning. While you may feel positive about your ability to repay the loan now, none of us know what the future may hold. Illnesses, job losses, or other unforeseen events could potentially impact your finances down the road.

Personal loan insurance offers a safety net that can provide peace of mind. If certain hardships occur, it helps by covering all or a portion of your monthly loan payments for a period of time. This can alleviate financial stress so you can focus on navigating the challenges at hand.

This blog post will take you through the ins and outs of personal loan insurance, helping you make informed decisions to safeguard your finances.

What is personal loan insurance?

Personal loan insurance, or payment protection insurance (PPI), is designed to cover your personal loan payments in specific situations. Its primary purpose is to ensure you can continue making loan payments if you encounter financial difficulties, such as job loss, illness, or injury.

There are two main types of premium loan insurance policies, each tailored to different needs:

Single and regular premium-reducing cover: In this policy, the insurance premiums gradually decrease over the course of the loan as the outstanding loan balance reduces.

Single and regular premium level cover: The premium amount remains constant throughout the loan’s duration, even as the loan amount decreases over time. This consistency in premium payments provides stability and predictability for policyholders.

Also, read – Personal Loan for 18 Years Old in India

How does personal loan insurance work? 

How personal loan insurance works is similar to any other insurance policy. However, it is explicitly designed to protect your loan repayments. This insurance provides support during unexpected events that may affect your ability to repay, such as unemployment, illness, disability or loss of life. 

You can choose an insurance plan for personal loans based on your needs, and the premium can be paid upfront or added to your EMIs. The premium amount depends on factors such as your age, loan amount, health, and repayment tenure.

Coverage options vary by lender, and most offer flexible, customisable plans. It is essential to speak with your lender to understand the available options and choose a plan that supports your financial goals and long-term security.

Also, read – What is Collateral Loan

Is personal loan insurance compulsory in India? 

Is personal loan insurance mandatory in India? The simple answer is no. While many lenders offer personal loan insurance, borrowers are not required to purchase it. That said, it can be a wise choice because it protects your loan repayments during unexpected situations. 

If you are unsure whether to opt for insurance for personal loans, take some time to evaluate your financial needs, long-term goals, and overall risk tolerance. You can also review the terms of your loan to determine whether insurance would provide you with added security. For additional clarity or personalised guidance, reach out to our experts at Tata Capital, who can help you choose the best option for your situation!

What is the premium for insurance for personal loans?

The premium or cost of the personal loan protection insurance plan can vary quite a bit based on certain factors. 

The table below includes some of the main factors affecting the premium amount for personal loan insurance.

FactorsPremium amount
AgeThe higher the age, the higher the premium.
HealthPoor health can lead to high premiums.
Loan amount and tenureHigher loan amounts and terms can lead to higher premiums.
OccupationRiskier jobs often result in higher premium rates.

Also, read – What is credit appraisal

Personal loan insurance benefits

Here are some of the most important personal loan insurance benefits you must consider while applying.

Protection in unforeseen circumstances: Life is unpredictable. No one can foresee job loss, debilitating illness, or accidents. Personal loan insurance provides a safety net that ensures your loan payments continue when you can’t make them yourself.

Preservation of credit score: A missed loan payment can significantly impact your credit score. Personal loan insurance ensures your credit remains intact, even if you face financial difficulties.

Family security: If you have co-signers or dependents responsible for your loan, a personal loan with insurance can prevent them from shouldering the burden in the event of your death.

Tax benefits:  Another significant advantage of a personal loan with insurance is the potential for tax benefits. Policyholders may qualify for tax deductions under Section 80C of the Income Tax Act, allowing them to reduce their overall tax liability.

Also, read – What is a Multi Purpose Loan?

Types of coverage provided by the insurance for personal loans

Losing a job or becoming ill can turn anyone’s world upside down. But loan coverage options exist to provide a safety net when life happens. 

Here are three types of coverage provided by personal loan insurance.

Disability coverage: It helps borrowers who cannot work due to injury or illness. It pays for either a portion or the full loan payment amount while the borrower is disabled, offering financial security during the recovery period.

Unemployment coverage: It provides financial relief for borrowers who lose their jobs involuntarily. It covers partial loan payments for a specified period, easing the financial burden during unemployment and giving the borrower time to find new employment.

Life insurance coverage: It ensures that if the borrower unfortunately passes away during the loan term, the remaining balance is paid off—this removes the repayment obligation from the borrower’s family, protecting their financial security.

Also, read – What is Outstanding Loan Amount?

Exclusions of personal loan insurance policies

Personal loan insurance can be useful, but it also has certain drawbacks you should be aware of, especially personal loan insurance exclusions. Depending on the lender, some types of unemployment, such as voluntary resignation or termination for misconduct, may not be covered.

In some cases, the policy may also offer only partial protection and may not cover the full loan amount. Since these terms vary across lenders, it is important to read the policy details carefully and clear any doubts in advance. Always speak with your personal loan insurance provider to confirm the coverage and understand what your loan insurance does not cover.

How to get personal loan insurance?

When considering personal loan insurance, there are a few factors you must consider:

#1. Compare policies

The most common mistake that policyholders make is that they select the first option. Instead, take the time to compare the terms and conditions of policies offered by different insurers. This way, you can find the best coverage policy that suits your needs.

#2. Understand the cost

Personal loan insurance typically comes with a monthly premium added to your loan payment. Be sure to understand the total cost of insurance over the life of your loan and how it affects your monthly budget.

#3. Comprehensive coverage

You must ensure that your chosen loan insurance plan covers all causes of death, not just accidental deaths. A comprehensive policy provides financial protection in various circumstances, offering peace of mind in various unforeseen events.

#4. Suitability for higher loan amounts

Some borrowers may require substantial loan amounts to meet their financial needs. Choosing a loan protection insurance plan suitable for borrowers with higher loan amounts is crucial. The coverage should be sufficient to address the repayment needs of significant loans, reducing the risk of financial strain in case of unexpected events.

#5. Consider your needs

Your need for personal loan insurance may vary depending on your circumstances. If you have a family, life insurance may be a higher priority, while payment protection insurance may be more crucial if you’re a sole income earner.

#6. Read the fine print

Like any insurance policy, reading the fine print and understanding the coverage, exclusions, and terms is essential. Know what situations are covered and under what circumstances the policy will pay out.

The bottom line

Personal loan insurance is a valuable shield for your finances when you need it the most. It provides peace of mind and keeps your credit score intact, ensuring your family doesn’t bear the financial burden in times of incapacity or loss.
At Tata Capital, we recognise the importance of this protection, which is why we offer personal loan insurance as an optional add-on when you apply for a loan. Our personal loans feature substantial loan amounts and competitive interest rates and require minimal documentation. To know more, visit our website.

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FAQs

What is personal loan insurance?

 

Personal loan insurance is a policy that safeguards your loan payments during unexpected events such as disability, health emergencies, unemployment, or death. It helps ensure your repayments continue even if your financial situation changes due to circumstances beyond your control.

How does personal loan insurance work in India?

 

Personal loan insurance in India helps cover your loan payments during unforeseen events like sudden unemployment, health emergencies, or loss of life, ensuring you don’t default. However, coverage varies by provider, and certain exclusions may apply, so it’s important to review the policy details carefully.

Is personal loan insurance compulsory in India?

 

No, personal loan insurance is not compulsory in India. However, it is often advisable because it can protect you from missed payments if you are unable to repay due to sudden job loss, illness, or other emergencies. In such situations, the insurance can temporarily cover your loan obligations.

What are the main benefits of having personal loan insurance?

Personal loan insurance cover offers valuable protection by covering your loan payments during unexpected situations like job loss, illness, or other emergencies. Other personal loan insurance benefits help you avoid defaults, protect your credit score, and reduce financial stress when your income is disrupted.

What common risks does personal loan insurance cover?

 

Personal loan insurance covers risks like sudden unemployment, major illnesses, or disability. These events can disrupt your income, and the insurance helps ensure your loan payments continue during that period. Coverage varies across providers, so it’s important to check the specific terms and exclusions.

What should I consider before buying insurance for my personal loan?

When buying personal loan insurance, it is important to consider the following:
  • Different policies
  • The total cost
  • Whether the coverage is comprehensive
    • Check whether it suits higher loan amounts and aligns with your personal needs. Always double check your coverage, claim conditions, and what the policy actually covers.
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