Insuring Your Family Against Loan Defaults

house-construction-1005491_960_720Loans are a convenient financial tool to help buy that dream home or the swanky new car. But, what if before repayment of the loan, the bread winner of the family faces an unfortunate event of death or disability? A Loan Protection Insurance could be a perfect tool at such times to ease the burden of the loan on the dependent family members.

What is Loan Protection Insurance?

Loan Protection Insurance, is an insurance policy which offers cover against monthly loan repayments, in case of death or unemployment due to disability. Generally used to protect a home loan, it is nowadays also available for personal and car loans.

Ravi, a young software professional, purchased the perfect home for his family of three with the help of a twenty year home loan. Unfortunately, within a year of moving in, Ravi succumbs to death in a road accident. The liability of the home loan now fell on his wife’s shoulders, along with the responsibility of running the household. With the gratuity and insurance compensation received from the company, Mrs. Ravi was partly able to meet the cost of the loan. She didn’t want to use her other investments and savings, as it would be required for future needs, and nor did she want to lose their dream home.

A loan protection insurance is an ideal solution in such a situation as it reduces the burden on the family to repay the loan and protects them against loss of the asset.

So Do I Need Loan Protection Insurance?

A loan is a liability, and the responsibility of repaying it lies with the borrower. In case of the borrower’s death, the liability falls on the dependents.  If the loan is not repaid by them, the lender could take possession of the asset. It is thus important that every liability should be covered by insurance to protect the family from losing the asset. Insuring a liability should form a part of every individual’s insurance calculations to ensure the family lives the same quality of life even after the bread winner’s death.

How does it Work?

Loan protection insurance works very similar to a term life policy. The amount of life cover available is linked to the outstanding loan amount, as per the loan repayment schedule. So, with every EMI payment, as the outstanding loan amount reduces, the insurance cover keeps reducing too. Some insurers also offer cover on a flat fixed amount payout to the beneficiaries, irrespective of loan amount.

In case of any eventuality, proceeds to settle the loan are paid by the insurance company either directly to the lender or to the family members.  If the borrower repays the loan, the policy would cease to exist, with the closure of the loan.  No premiums would be repaid in such cases or if the borrower outlives the loan repayment term.

Key Features

  • Eligibility: Generally between 18 years to 60 years of age.
  • Premium payment: Monthly or on one time basis. Some banks combine the EMI and premium together.
  • Cost of Premium: Premiums are based on age of borrower, term, rate of interest and amount of the loan.
  • Available as joint Insurance cover for joint loan application ensuring peace of mind for both.
  • Tax benefits: Premiums offer an income tax benefit u/s 80 C.

Points to Ask Your Insurer

While seeking loan protection insurance, the following points need to be made clear from the insurer.

  • In case of an eventuality, will the proceeds of the insurance be paid directly to your lender or to your family? You would need to keep your immediate dependents aware of the process, to avoid any delays in repayment or claims.
  • What are the risks covered by the policy? Does it cover only death by accident or by other causes too?
  • Check the criteria covered in the eventuality of disability, such as temporary disability or permanent partial disability.
  • Ask your insurance company about the exclusions under the policy and keep your family informed of the same.

Loan protection insurance is a perfect solution to protect your family against defaults and distress in case of any unforeseen events. If you have a loan, you have an increased exposure to such risk. By spending that extra bit to insure your loan, you give yourself and your family peace of mind, and ensure that the asset stays with the family.

*Featured Image: Pixabay