The benefits of insuring your loan!

Harshad was a young software professional working in a multinational company. After a few years of working he was in a position to apply and get a home loan for a house close to his heart.

Unfortunately, a year after he got the home loan, he met with an accident and was bed ridden for more than six months. In such a situation he was not able to make his home loan EMI payments and had to eventually let go of his house. Such an unfortunate situation could have been avoided if Harshad had gone in for home loan insurance.

Loan insurance is a concept catching up in India. Most people taking a loan are not aware about what they would do in case they are unable to make the monthly payments towards the loan.

What is Loan Insurance?

Loan protection insurance, or loan payment protection insurance, is a form of payment protection insurance. This type of insurance can help you protect your monthly loan payments if you become unemployed or suffer an accident or sickness. Loan protection insurance will typically be used to protect a home loan, car loan or even sometimes personal loans.

Under a loan insurance cover, the lump sum amount reduces as the outstanding loan decreases as per the loan schedule.

What are the benefits of loan insurance?

Loan insurance means during tough times, you'll have an insurance cover to take care of the EMIs or of the outstanding loan amount. This is especially useful:

• In case of death or disability due to an accident or sickness
• In case of loss of job
• This effectively reduces the burden on your family in case of any unfortunate event that occurs with you. They would be saved from the financial trauma of paying off the loans.
• In cases of a joint loan application, a joint loan insurance plan can be taken which will effectively cover you and your partner. Both will have the reassurance that if either of you should be faced with redundancy, illness, have an accident or even die, your repayments will be made for you.

What kinds of loans are covered under such an insurance schemes?

Loan insurance is offered mainly for home loan borrowers. However, some banks offer loan insurance for personal loans as well as auto loans.

Do I have to pay any premium for such insurance? If yes, how much?

Like any insurance you do need to pay premium for the insurance. There are only a few banks which offer this kind of insurance without any premium. Premium amounts usually vary from bank to bank and depend primarily on:

• The age of the person taking the loan -- the premium is usually higher for older people
• The loan amount -- if the loan amount is high, the premium payment will also higher owing to the fact that the bank has a higher liability in such cases
• The tenure of the loan -- If the repayment period is longer, the premium to be paid is also higher
• The medical record of the individual -- if your physical health is good, the premium amount comes down. However, if you are suffering from any kind of serious ailments the premium amount will go high

What are the things to keep in mind while checking about loan insurance?

Loan insurance is something that you need to give careful thought to. You need to check:

• What does the loan insurance cover? -- Does it cover death by accident or death by any cause? Does it cover temporary disability only or does it cover permanent disability as well?
• Eligibility for the insurance -- Check about the eligibility criteria for the insurance. Check whether the loan needs to be of a certain amount
• Payment of premium -- Check whether you can pay the premium as part of the EMI or does it have to be made as a lump sum amount
• Is a medical check-up necessary? -- Check whether a medical checkup is necessary in all cases.

Are there any tax benefits because of the insurance being a 'life insurance' scheme?

Yes, there are tax benefits that you can get with such kind of insurance.

Since you are paying a life insurance premium, you can get deduction under Section 80C. However, if it is clubbed with your EMI payments, you will not get the insurance benefit.