Financial responsibilities and requirements might arise anytime and if you don’t have the required funds to meet your financial obligations, you might resort to loans. Personal loans are a very popular source of finance for many. They are unsecured and are offered without much fuss. You also get repayment tenure of up to five years over which you can repay the loan affordably. But what if an eventuality occurs making you unable to pay off your loan?
Death, disability, critical illness and unemployment are some common eventualities which might cause you to default on your loan. The loan burden would, then, fall on your family and create a financial crisis. Can you avert this crisis?
Yes, you can. There are personal loan insurance plans available in the market. These plans take care of your loans if you are unable to clear them due to unavoidable contingencies. In case of death, disability, illness or unemployment, the loan insurance plans pay the outstanding liability preventing the burden from falling on your family.
Salient features of loan insurance plans
Here are some important features of loan protection plans which make them unique –
- The plans can cover death, disability, unemployment and, in many cases, critical illnesses too
- The plan can be offered as an individual loan insurance plan or a group loan insurance plan
- If there is any co-borrower for the personal loan, the co-borrower would also be covered under the plan
- The coverage is offered in two variants – the level sum assured and decreasing sum assured. Under level sum assured option, the coverage amount remains the same throughout the policy tenure while under the decreasing cover option the coverage amount reduces every year. You can choose any coverage option that you like
- Premiums for the plan can be paid in one lump sum through the single pay option or throughout the term of the loan. If you choose to pay premiums over the loan tenure, the amount of premium would be added to the EMIs and collected with the repayment amount.
Benefits of having a loan insurance plan
The main benefit of having a loan insurance plan to cover your personal loan is the fact that the policy prevents the loan burden from falling on your family’s shoulders. If your earning capacity is hindered due to death, disability, sickness or unemployment, the loan insurance policy would pay off the outstanding amount of loan and get rid of your liability. Moreover, since these policies also cover co-borrowers, the co-borrowers would also be secured of repayment of the loan even in your absence. The cover, therefore, proves to be beneficial.
Another advantage of buying a loan insurance plan is the tax benefits that you can get. The premiums paid for the plan are allowed as a deduction under Section 80C of the Income Tax Act up to INR 1.5 lakhs. Thus, you can also save your tax liability through the loan protection plan while at the same time insuring your debts.
Top #6 Things to keep in mind when buying loan protection plans
When you are buying a loan protection plan to cover your personal loan liability, here are some things which you should keep in mind –
- The plan is not mandatory in nature. Though the lender might insist on you buying a loan protection plan, the choice to buy the plan rests entirely on you. If you think you can repay the loan without any defaults, you might opt-out of buying the policy. However, having coverage is better for financial security.
- The exact coverage under loan protection plans varies from plan to plan. Some plans might cover only accidental deaths or disablements while others might also cover natural deaths and/or unemployment. So, when buying the loan protection plan, find out the eventualities which are covered by the plan. The more comprehensive the plan the better it would be.
- You should always compare different loan protection plans and then choose one. The lender might offer you a plan as per its choice but you have the freedom to compare other available plans and then buy one which has the best benefit structure at the lowest premium rate.
- The premiums of the policy depend on the term of the loan, the loan amount, your age and medical condition. If the loan amount is high, loan tenure is long, age is high or you have adverse medical conditions, the premium would be high.
- Always ensure that the premiums are affordable when you buy the policy. If the premiums are unaffordable your EMIs would increase and the loan cost would prove to be a burden.
- In case you foreclose the loan by paying the due amount before the stipulated tenure, the loan insurance coverage might also end. So, check the foreclosure terms in the coverage before buying.
A loan insurance plan is a good addition to your personal loan as it shoulders the burden of repaying the loan in case you cannot. So, buy the coverage and ensure that the loan is paid in all circumstances. You would be able to avoid late payment charges in case of defaults and your credit score would also not be hampered. The premiums are not very high and if you compare the plans before buying, you can even get the best plan at the lowest rate. So, secure your personal loan under a loan insurance plan and buy yourself peace of mind.