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Mr. Harshit Gaur runs a bakery in South Delhi. A year back, he applied for a personal loan for the expansion of his business, towards which he was paying the installments. Unfortunately, he met with critical illness and got bed-ridden for a long period of time. In such a situation, he was unable to pay his personal loan EMIs due to loss in business too. Eventually, his bakery also got shut down.

Such an unfortunate situation could have been avoided if Mr. Harshit had gone for Personal Loan Insurance. 

Like Mr. Harshit, many people in India are unaware of Personal Loan Insurance Policies. This concept was earlier only applicable to Home Loans, but it is now slowly catching up with Personal Loans too. 

What is a Personal Loan Insurance?

The applicant receives the loan amount only after the deduction of the insurance amount which he has opted for. Loan insurance is taken because if in case of any unforeseen circumstances, the family members can approach the insurance company to settle the debt amount with the bank. The dependents will be saved from the burden of paying the loan installments.

What are the benefits of Personal Loan Insurance?

When faced with a rough patch in life, a loan insurance cover will help tackle the payment of EMIs or the outstanding loan amount. Personal loan insurance helps -

• In case of loss of employment. 
• In case of death, disability, or critical illness.
• Few banks offer money-back plans on personal loan insurance policies, which the borrower receives at the end of the plan.
• Some loan insurance policies can provide tax-benefits under Section 80C.

The family members will be saved from the burden of paying off the debts, in the event of occurring of an unfortunate incident. It acts as a shield for the dependents of the borrower.

A joint loan insurance plan can be taken with your spouse, which will effectively take care of you and your partner in times of distress. You can have an assurance that the loan payments will remain unaffected if faced with an unforeseen situation. 

What all points to look for while checking for a loan insurance

Careful analysis should be done before finalizing for loan insurance.

• Does personal loan insurance cover death by accident or death by cause? Will a permanent disability be considered, or a temporary disability also will be taken care of?
• Find out if the premium will be paid as a lump sum amount or will be paid as a monthly premium.
• Whether a medical checkup will be conducted before opting for the insurance?
• Check for the eligibility of the insurance policy. Is it available for any amount or only for a certain amount?
• In some cases, the loan insurance may lapse or expire if the loan to transferred to another bank. Figure out if you will have to renew it while transferring a loan.
• Few banks provide joint insurance policies for both parties.

What do I need to pay for taking a loan insurance policy?

Similar to any other insurance plan, a premium will have to be paid for the loan insurance. The premium amount varies according to the applicant's age, physical health, loan amount, and tenure, and it varies from bank to bank. There are only a few banks that offer insurance without any premium. 

• For a higher loan amount, the premium is also higher, as the bank has a higher liability in such cases.
• The premium varies with the age of the person. It is higher for old age people.
• According to the tenure of the loan, the repayment period also varies. For a longer tenure, the premium charged also is higher.
• For individuals with sound health, the premium charged will be lower than for individuals with medical ailments.

What are various types of Personal Loan Insurance Policies? 

Unlike home loans, the premium for insurance cover is low as the amount and tenure remain low.

• Single and regular premium reducing cover- In this case, the premium amount decreases, as the outstanding loan amount decreases.
• Single and regular premium level cover - The premium amount remains the same even if the outstanding loan amount decreases.

Banks offering accident cover for personal loans

• HDFC Bank
• IDBI Bank
• ICICI Bank

What all factors to consider before going for Personal Loan Insurance Policies?

• Compare the features of the insurance offers- Different banks offer personal loan insurance with varied features and benefits. The premium rate offers are different from different companies. Therefore, it is essential to compare the options before making a final call in purchasing an insurance policy. Few insurance companies do not cover the loss of a job under the policy. If you think you might be confronted with such a scene in the future, then look out for other options.

• Understanding the terms and conditions- Carefully read the terms and conditions mentioned in the policy, to avoid getting ditched at the last moment. It will help you avoid getting into situations where you will not be able to claim the insurance cover.

• Plan your expenses accordingly- Since buying an insurance policy will add up to the cost of installments, you should plan your payments in accordance with it. Few changes in the lifestyle will help running the day to day life without putting much strain on the pocket. When you have planned for availing a loan, then securing the dependents from getting burdened of paying the debts due to unforeseen circumstances, is a wise decision you should go ahead with. 
• Do a thorough analysis before buying an insurance policy - Often, banks pitch insurance cover at the last moment, which might turn out to be a costly affair for you if you are not prepared with the homework. In many cases, on foreclosing the loan before the set tenure, the insurance benefits associated with it will likely be nullified. It is advisable to figure out if there will be any refund of the premium paid, or it will be nullified.

Read here Home Loan Insurance