Taking out a personal loan is an important financial decision that requires careful planning. While you may feel positive about your ability to repay the loan now, none of us know what the future may hold. Illnesses, job losses, or other unforeseen events could potentially impact your finances down the road.
Personal loan insurance offers a safety net that can provide peace of mind. If certain hardships occur, it helps by covering all or a portion of your monthly loan payments for a period of time. This can alleviate financial stress so you can focus on navigating the challenges at hand.
This blog post will take you through the ins and outs of personal loan insurance, helping you make informed decisions to safeguard your finances.
What is personal loan insurance?
Personal loan insurance, or payment protection insurance (PPI), is designed to cover your personal loan payments in specific situations. Its primary purpose is to ensure you can continue making loan payments if you encounter financial difficulties, such as job loss, illness, or injury.
There are two main types of premium loan insurance policies, each tailored to different needs:
Single and regular premium-reducing cover: In this policy, the insurance premiums gradually decrease over the course of the loan as the outstanding loan balance reduces.
Single and regular premium level cover: The premium amount remains constant throughout the loan’s duration, even as the loan amount decreases over time. This consistency in premium payments provides stability and predictability for policyholders.
What is the premium for insurance for personal loans?
The premium or cost of the personal loan protection insurance plan can vary quite a bit based on certain factors. The table below includes some of the main factors affecting the premium amount for personal loan insurance.
Factors
Premium amount
Age
The higher the age, the higher the premium.
Health
Poor health can lead to high premiums.
Loan amount and tenure
Higher loan amounts and terms can lead to higher premiums.
Occupation
Riskier jobs often result in higher premium rates.
Personal loan insurance benefits
Here are some of the most important personal loan insurance benefits you must consider while applying.
Protection in unforeseen circumstances: Life is unpredictable. No one can foresee job loss, debilitating illness, or accidents. Personal loan insurance provides a safety net that ensures your loan payments continue when you can’t make them yourself.
Preservation of credit score: A missed loan payment can significantly impact your credit score. Personal loan insurance ensures your credit remains intact, even if you face financial difficulties.
Family security: If you have co-signers or dependents responsible for your loan, a personal loan with insurance can prevent them from shouldering the burden in the event of your death.
Tax benefits: Another significant advantage of a personal loan with insurance is the potential for tax benefits. Policyholders may qualify for tax deductions under Section 80C of the Income Tax Act, allowing them to reduce their overall tax liability.
Types of coverage provided by the insurance for personal loans
Losing a job or becoming ill can turn anyone’s world upside down. But loan coverage options exist to provide a safety net when life happens. Here are three types of coverage provided by personal loan insurance.
Disability coverage: It helps borrowers who cannot work due to injury or illness. It pays for either a portion or the full loan payment amount while the borrower is disabled, offering financial security during the recovery period.
Unemployment coverage: It provides financial relief for borrowers who lose their jobs involuntarily. It covers partial loan payments for a specified period, easing the financial burden during unemployment and giving the borrower time to find new employment.
Life insurance coverage: It ensures that if the borrower unfortunately passes away during the loan term, the remaining balance is paid off—this removes the repayment obligation from the borrower’s family, protecting their financial security.
How to get a personal loan insurance?
When considering personal loan insurance, there are a few factors you must consider:
#1. Compare policies
The most common mistake that policyholders make is that they select the first option. Instead, take the time to compare the terms and conditions of policies offered by different insurers. This way, you can find the best coverage policy that suits your needs.
#2. Understand the cost
Personal loan insurance typically comes with a monthly premium added to your loan payment. Be sure to understand the total cost of insurance over the life of your loan and how it affects your monthly budget.
#3. Comprehensive coverage
You must ensure that your chosen loan insurance plan covers all causes of death, not just accidental deaths. A comprehensive policy provides financial protection in various circumstances, offering peace of mind in various unforeseen events.
#4. Suitability for higher loan amounts
Some borrowers may require substantial loan amounts to meet their financial needs. Choosing a loan protection insurance plan suitable for borrowers with higher loan amounts is crucial. The coverage should be sufficient to address the repayment needs of significant loans, reducing the risk of financial strain in case of unexpected events.
#5. Consider your needs
Your need for personal loan insurance may vary depending on your circumstances. If you have a family, life insurance may be a higher priority, while payment protection insurance may be more crucial if you’re a sole income earner.
#6. Read the fine print
Like any insurance policy, reading the fine print and understanding the coverage, exclusions, and terms is essential. Know what situations are covered and under what circumstances the policy will pay out.
The bottom line
Personal loan insurance is a valuable shield for your finances when you need it the most. It provides peace of mind and keeps your credit score intact, ensuring your family doesn’t bear the financial burden in times of incapacity or loss.
At Tata Capital, we recognise the importance of this protection, which is why we offer personal loan insurance as an optional add-on when you apply for a loan. Our personal loans feature substantial loan amounts and competitive interest rates and require minimal documentation. To know more, visit our website.
21 December 2023
6 mins read
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