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Tata Capital > Blog > Shubh Chintak > 6 Key benefits of insurance on loans

Shubh Chintak

6 Key benefits of insurance on loans

6 Key benefits of insurance on loans

Whether it’s meeting a short-term emergency or fulfilling a long-term dream, getting a loan is one of the easiest and most convenient ways to finance these expenses. From personal loans and home loans to vehicle loans and education loans, these nifty financial instruments allow you to comfortably finance different aspects of your life without dipping into your savings.

But life can be uncertain. A loss of income, disability, or death can affect your ability to repay these loans, leaving you and your family in financial distress. In such situations, having loan insurance can be a savior.

What is loan insurance?

Loan insurance is a type of insurance plan that helps you repay your outstanding loan during unexpected situations like job loss, permanent or partial disability, or death. In these situations, the insurer pays the monthly EMIs on your behalf, preventing you from defaulting on the loan.

The premium for loan insurance is typically determined based on factors like the loan amount, repayment tenure, your age, and health conditions.

Benefits of loan insurance

Certain situations in life can hinder your ability to repay the loan, impacting your and your family’s financial and mental well-being. During such situations, loan insurance can offer the following benefits:

  1. Financial security for your family

The unfortunate event of your death or a permanent or partial disability can put the burden of loan repayment on your family, especially if you’re the sole breadwinner. If they are unable to repay the loan on time, they will lose the asset for which you’ve taken the loan. Insurance on loans protects your family from this financial strain by taking care of the repayments.

  1. Protection of your assets and collateral

If you’re unable to repay the loan due to unemployment, disability, or death, lenders might seize your assets, including your savings and even your home. Moreover, if you’ve taken a secured loan against assets like your home or securities, you will lose the collateral if you default on the loan. During such times, loan insurance can protect your assets and collateral by repaying the loan on your behalf.

  1. No need to dip into savings

Loan insurance takes care of the outstanding loan amount in the event of a disability, critical illness, or death. This ensures the borrower or their family members don’t have to dip into their savings or sell off personal assets to repay the loan during an already difficult time.

  1. Unaffected credit score

Defaulting on loan payments can cause a dip in your credit score, affecting your eligibility to secure credit in the future. When you default on a loan, lenders see you as a risky borrower, making them less likely to approve your application for loans or credit cards. Loan insurance helps you prevent defaults due to unavoidable situations, ensuring they don’t affect your credit score.

  1. Flexible and customizable

Loan insurance plans can be tailored to meet the borrower’s unique requirements. You have the flexibility to select the coverage amount, tenure, and other policy terms that best suit your financial situation. Depending on the insurer’s policies, you can even add or remove certain features based on their preferences.

  1. Peace of mind

One of the most significant benefits of loan insurance is the peace of mind it offers, knowing the repayment burden will not fall on your family should anything happen to you.

Eligibility for loan insurance & common coverage options

Most salaried and self-employed borrowers are eligible for loan insurance benefits in India. The borrower must meet the age limit criteria specified by insurers and have a regular income. Loan insurance applies to personal, home, or vehicle loans secured from banks or NBFCs.

Loan insurance isn’t the same as loan against insurance. Thus, the coverage also differs. Loan insurance offers the following common coverage options:

  • Life coverage: The insurer pays the entire outstanding loan amount in case of the borrower’s death.
  • Critical illness coverage: The insurer is responsible for loan repayment if the borrower is critically ill.
  • Disability coverage: The insurer supports you in repaying the loan if your disability affects your income. There are certain restrictions on the amount.
  • Job loss coverage: The insurance offers coverage for a few EMIs if the borrower faces a sudden employment loss.

How to claim loan insurance: Steps, documents & process in India

There is a structured process for claiming loan insurance benefits in India. Taking action on time is essential to avoid rejection.

Below are the key steps and requirements:

  • Inform the lender and insurer: The nominee or family member should notify the bank and insurance company immediately in the event of death, disability, or illness.
  • Collect the required documents: The common documents to submit include the claim form, death or medical certificate, identity proof, loan account details, and policy document.
  • Submit the claim application: The completed claim form, along with all supporting documents, must be submitted to the insurer. You can do it through the bank or directly.
  • Verification and assessment: The insurance company verifies the claim details, medical records, and policy terms.
  • Claim settlement: Once approved, the insurer pays the outstanding loan amount directly to the lender, reducing or closing the loan.

Loan insurance cost & factors affecting premiums

Loan insurance cost depends on several factors. You can pay it as a single premium or in installments as per your preference. The factors affecting loan insurance cost or premiums are:

  • Loan amount and tenure: The premium is higher if the loan amount is high and the tenure is long.
  • Borrower’s age: The risk is higher with older borrowers. Thus, the premium is also higher.
  • Type of coverage: Plans covering disability, illness, or job loss cost more than death-only coverage.
  • Health conditions: The premium or limit coverage may increase if the borrower has existing medical issues.

Conclusion

While loans offer a convenient way to manage big-ticket expenses, situations like a job loss, disability, or death can affect your repayment capability, leaving you and your family in emotional and financial stress. Therefore, it’s a smart decision to get loan insurance to avoid these inconveniences and ensure you and your family don’t struggle financially during these tough times.

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FAQs

Is loan insurance mandatory for all personal or home loans in India?

No. Getting insurance on loans isn’t mandatory in India. Banks and NBFCs may offer or recommend it, but it is your choice to accept or reject loan insurance. There is no legal obligation.

How does loan insurance impact my loan interest rate or approval?

Loan insurance usually doesn’t affect your loan interest rate or approval chances. However, if you purchase loan insurance, your total loan cost may increase due to the insurance premium.

Does loan insurance cover job loss, illness, or only death?

Yes, loan insurance covers job loss, critical illness, and death. However, the extent to which your loan is covered may vary based on the situation. In case of the borrower’s death, the entire outstanding amount is cleared. But, in case of job loss, EMIs are paid for a specific term.

Can I cancel my loan insurance policy and get a refund?

Yes, you can cancel loan insurance after reviewing the insurer and policy terms. A refund is usually given if you cancel the insurance within the free-look period, which is 15 to 30 days. Certain charges may be deducted before issuing the refund. 

What is the major difference between loan insurance and life insurance?

Loan insurance eases the financial burden of the borrower’s family by clearing the loan in case of an emergency. Life insurance, on the other hand, protects your family by providing a payout they can use freely, not just for clearing loan dues.

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