What happens if you have taken a loan but are unable to repay it? This could happen because of a business loss, delayed payment from a client (if you are a businessperson) or delayed salary (if you are an employee), unplanned large expenses, unforeseen medical expenses, or other situations.

The simple answer for this situation is: Loan Insurance. Lets trying and understand what is the meaning of loan insurance in this blog post

What is Insurance on Personal Loan?

Loan Insurance, also known as Loan Protection Insurance, is a product designed specifically to cover your monthly loan payouts in case of temporary/permanent disability, loss of job, or any such eventuality. It protects the borrower from defaulting on loans.

It provides coverage for the insured loans; the borrower can use the loan insurance amount to repay the personal loans that have been insured. The insurance policy you choose decides the specific events that are going to be covered under the insurance.

You can take a loan insurance on a variety of loans, including home loan, business loans, education loans, and even personal loans. One can decide to pay insurance premiums alongside the loan instalments or as a lump sum.

Why should one opt for a Loan Insurance?

Take the instance of Deep, a 24-year-old, who left his small town to join an MNC in Mumbai. To cover his major expenses of moving to the big city, he availed a personal loan of ₹5,00,000. He had his repayment plan figured: he had a comfortable paycheck coming in every month and was entitled to a half-yearly bonus after 6 months of joining.

Unfortunately for him, just a week before his joining, he met with an accident and was advised 12 weeks of bed rest followed by intensive physiotherapy for 4 weeks. He spoke to his new manager who was kind enough to push his joining date by 4 months; but that meant he was unemployed for that time, with the obligation of monthly loan installments!

The good news is that he was smart enough to have taken loan insurance for such emergencies and so, could manage his loan payments even when he didn’t have a regular salary kicking in.

Insurance on Personal Loan is completely voluntary and whether you want to opt for it, is entirely up to you. However, there are a couple of compelling reasons to go for loan insurance:

  • Your family doesn’t face the brunt of loan liabilities if there is an unforeseen situation that makes you incapable of paying off your loan.
  • Your credit score remains intact since you don’t miss on any repayments, thanks to the insurance coverage.

Learn More About : Factor That Affect Your CIBIL Score

How does Loan Insurance on Personal Loan Work?

Like any other insurance, you pay a premium to cover your loan. The premium can be paid on a monthly basis or as a lumpsum. This will typically depend on the loan amount, your age and health status, as well as the loan tenure.

How to Select the Right Loan Insurance?

Once you decide to get loan insurance, make sure you select the right one. Check these key factors when you are making your decision:

  • What events or instances does the insurance cover? Disability, unemployment, death.
  • What is the type and amount of loan that is covered under the insurance? Some insurers cover only home loans or only personal loans, and some do not cover loans that exceed a certain amount.
  • What is the mode of payment for the insurance premium?
  • Understand tax implications: if premium is clubbed with loan EMI, there is no tax benefit; however, if premium is paid separately, you can claim tax rebate (section 80 C).
  • Double check and be informed of all the terms and conditions of the loan insurance policy: inclusions, exclusions, special citations (if any), and exempted health conditions (if any).

Beware of loan providers who mis-sell. Borrowers are often duped into believing that taking a loan insurance reduces the interest on your loan; this, however, is only an illusion. No such scheme prevails.

What are the Different Types of Loan Insurance Plans?

Loan insurance for personal loans typically has low premium rates since the loan amounts are reasonably low as well (compared to those for home loans).

A borrower has the option of –

– Reducing Cover Insurance – wherein the premium amount reduces with the tenure of the loan (because the outstanding loan amount also reduces)
OR
– Level/Flat Cover Insurance – wherein the premium amount remains fixed irrespective of the status of the outstanding loan amount.

How is Loan Insurance Different from a Term Insurance Policy?

Loan insurance or loan protection insurance is a very different and specific product. It covers the loan amount of the specific loan that a borrower has availed, be it personal loan, vehicle loan, or home loan. In case something unforeseen happens to the borrower, such as disability, death, sickness, or unemployment, because of which he/she is unable to repay the loan, the insurer covers the repayment based on the conditions of the insurance policy.

Term insurance, on the other hand, is a simple insurance protection policy that protects the policy holder’s family from the financial loss that would occur in his/her absence (death/disability). The insurer awards the insured amount to the beneficiary in case the policy holder dies or is incapacitated. The liabilities taken by the insured individual may or may not get covered by this insurance amount. This means that the term insurance amount may or may not cover the entire amount of the liabilities, and if it does, it may not leave enough funds for financial comfort.

Hence, while term insurance is a definite must for protecting the financial interests of your loved ones; loan insurance is equally, if not more, important to take care of your financial liabilities during your lifetime and beyond.


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Satyam Kumar is banking industry veteran with enriched experience of more than 20 years. Apart from founding LoanTap and FinTech Association of Consumer Empowerment, he is an avid traveler and holds keen interest in Blogging. He has amassed profound knowledge in FinTech trends, banking, consumer trends, food and mythology which he loves sharing with others.
Satyam kumarSatyam KumarCEO & Co-Founder, LoanTap asset 8 asset 9
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