What is Loan Protection Insurance? Types, Meanings & Benefits

Whenever taking out a loan, it's crucial to consider how you would manage the repayments if unexpected circumstances arise.

For example, you have taken a loan to buy your dream car or home, but due to certain unforeseen situations, you are unable to pay and the monthly loan repayment has become a stress. 

What will you do in such a situation? 

Obviously, you can’t give excuses to banks, but you can buy loan protection insurance to cover the loan payments when you are not able to pay those EMIs. 

Now, in this blog, we’ll explain everything about loan protection insurance and how you can get this for yourself. 

What is Loan Protection Insurance?

Loan protection insurance, like any other type of insurance, keeps you and your family safe during challenging times. It helps you repay loans when unforeseen events, such as job loss, a sudden death, or an accident, occur. In these situations, the loan insurance relieves the burden of loan repayment from you and your family. 

You can think about loan protection insurance as similar to life insurance. 

Life insurance helps your family by paying a lump sum amount if a death or disability occurs. In the same way, loan protection insurance helps you by paying monthly EMIs on your behalf for a certain period in similar situations. In short, it offers you peace of mind when your life takes an unexpected turn. 

Also, if you are taking a loan of a large sum, then consider buying an insurance policy as well. It is especially important when you have a mortgage loan where your property is at risk or even a personal loan that has a high monthly EMI. 

Different Types of Loan Insurance

Now, we have got an understanding of what is loan protection insurance. Let's discuss its different types.

• Reducing Cover Insurance

Reducing cover insurance, also known as decreasing term insurance, is a type of life insurance where the coverage amount decreases over time because the premium amount is linked with the loan amount. 

For example, when you first take a loan, your debt is at its highest. So, your premium will also be higher. But once you make a payment, your loan balance reduces so do the policy premium amounts. 

• Level Insurance

In level insurance, the premium that you have to pay stays the same throughout the total term of your policy. In this case, even if your loan balance ever goes down, the premium amount stays the same and you keep paying the same amount until the end. 

In simpler terms, it is like a monthly subscription for a service. No matter if you take a lot of that service or a little, the monthly charge stays the same.

• Hybrid Loan Insurance

Hybrid loan insurance combines features from both reducing cover insurance and level insurance. The coverage amount stays the same for the first year, but from the second year onwards, it decreases along with the loan balance.

Benefits of Loan Protection Insurance

Below are some of the key benefits of loan protection insurance that may help you decide whether you should choose the coverage or not! 

• Provides financial security

The most significant benefit that loan protection insurance provides is financial security. In your difficult times, the insurance would help you when you are not able to meet the loan obligations because of job loss, health issues, or any other situation. 

• Helps In Buiding a Good Credit Score

Loan protection insurance will help you maintain a good credit history. But how? 

As you already know, not paying EMIs timely negatively impacts your credit score. But this insurance will help you in building a healthy credit score, even in difficult times.

• Flexibility & Customization

You can customize the loan protection insurance according to your needs and requirements. Choose from various coverage options that suit your loan amount, repayment tenure, and financial situation.

• Relief For Your Family

In case of your sudden death or any grave illness, the burden of loan repayment is passed onto your family. But the insurance coverage will help your family to pay the loan if such an unfortunate event happens.

• Protects You From Spending Your Savings

If any type of emergency happens, we usually tend to spend our savings on it. But the loan insurance prevents the depletion of your savings so that you can keep the savings intact for any more pressing needs.

Things to Consider Before Purchasing Insurance for a Personal Loan

Purchasing loan protection insurance for any kind of loan is a critical task. So, let's learn about a few things that you should always keep in mind before getting it. 

• Total Insurance Cost

The first thing you need to consider is the total cost of the insurance rather than the monthly premium. Read on to find out why! 

While taking loan protection insurance, the monthly premium in that time may seem very less. But here’s the reality: when you calculate it for the whole loan term, the amount will be a bit hefty and become problematic to pay in the long run. 

• Claim Settlement Process

Ask the insurance company if they allow you to file a claim online. Carefully review all the documents that are needed for the claim settlement process. Also, it’s vital to check the claim settlement ratio before making the final decision.

• Policy Wordings 

One of the biggest mistakes that people make while buying insurance is not reading the “policy wording” carefully. As a result, this is what they hear from the insurer at the time of claim settlement: “Your claim is rejected because our policy does not offer coverage for this situation.” 

If you don’t want the same situation happening to you in the future, read the policy wordings properly and identify all the policy exclusions. 

• Payment Method

Check the details of the premium payment method before buying the insurance. Some insurers want you to pay the entire premium on time, while some charge on a monthly basis. So, verify all the details beforehand and make a wise decision keeping in mind your financial situation.

The Bottom Line

Now that the blog is about to end, it’s clear that loan protection insurance helps reduce an individual’s financial burden during difficult times by paying EMIs for a certain period of time. 

Still, if you are confused about whether to buy loan protection insurance or not, get in touch with our insurance advisor at +91-7551196989 and seek clarity on all your queries. 

Frequently Asked Questions (FAQs)

Ques 1. What is loan protection insurance?

Ans. Loan protection insurance is a type of income protection insurance that is designed to cover loan repayments if you lose your job or are unable to work due to an accident or illness. It usually covers various types of debts, including car finance, credit cards, and mortgages.

Ques 2. What are the cons of personal loan insurance?

Ans. Loan insurance is costly. It does not even reduce your loan interest rate but only offers you protection if any unforeseen situation occurs. So, before you buy any loan insurance, evaluate the expense of the insurance and the benefits you are going to receive.

Ques 3. What protections would the loan protection insurance provide?

Ans. Personal loan insurance typically covers involuntary unemployment, disability, death, and critical illness.

Ques 4. Is getting loan protection insurance necessary?

Ans. No! Getting personal loan insurance is voluntary; nobody is going to force you! 

But it’s great if you want to secure your loan repayments during unfortunate events. You pay a very small premium, and in return, you get the assurance that the loan repayment will be taken care of in hard times. 

Also, the lender might encourage you to purchase the loan insurance and provide you with a slightly reduced interest rate on the loan.

Ques 5. Is loan protection insurance refundable?

Ans. Typically, the loan protection insurance is not refundable. However, some policies may offer a refund of the premium at the end of the loan tenure if you do not make any claim.