Indian banks wrote off loans worth ₹2.09 lakh crores in FY 2022-23, taking the total loan write-offs to ₹10.57 lakhs in the 5 years to 2023, according to the RBI’s Right to Information notice. Such write-offs affect banks’ profitability since they have to set aside money to cover such loans. How does this relate to you as an individual? Well, when you default on loan repayments, it will lead to the bank having to write-off your debt, which will adversely impact your credit history and have a negative impact on any future loan applications.
The good news is that you can protect yourself against loan defaults with credit life insurance. This makes sense especially when you have taken a large loan for a home, vehicle, or child’s education. It plays an instrumental role in ensuring your assets do not become a liability. Such loan default insurance safeguards your family from the burden of repayment in your absence. Read on to learn more.
Credit Life Insurance: How Does It Work?
Simply put, credit insurance pays the lender on the policyholder’s behalf in the event that the policyholder passes away, loses their income, or suffers a disability during the tenure of the policy. The policy is usually linked to a specific debt, such as a home or personal loan, credit card, etc., and is intended to pay off any outstanding debt of the policyholder if they pass away during the policy term. It is an excellent way to protect yourself and your family against facing a huge financial burden.
Credit life insurance cover also protects businesses against financial risks due to customer default. It helps keep your business running and reduces hassles related to customer insolvency in the future.
Benefits of Credit Life Insurance Cover
If you have taken on a large loan that will take several years to repay, credit insurance offers several benefits to keep yourself and your family financially protected.
Loan default protection means that your family is not financially burdened after your demise.
It offers targeted coverage, since it is linked to a specific debt.
Obtaining a policy is often simpler than buying traditional life insurance, with a quick and simplified application process.
You have the flexibility to choose to pay the premium in one go or on a monthly basis.
The premiums are usually affordable, similar to term life insurance.
The claim process is simple and claims are settled quickly.
On the whole, it is a great way to ensure peace of mind for yourself and your family when taking a large loan.
Types of Credit Life Insurance
There are basically three types of insurance you can choose from:
Credit Disability: The insurance provider will pay off existing debts if the policyholder has sustained a permanent disability, such as loss of both hands and legs, vision loss in both eyes or complete loss of speech.
Credit Property Insurance: A home or any other collateral pledged towards the loan is protected with this insurance. It also covers goods bought with the loan amount.
Credit Involuntary Unemployment Insurance: A part or full monthly loan of the policyholder is paid in case of involuntary unemployment. This includes layoffs or labour disputes.
You can look for insurance providers that also offer top-ups to protect co-borrowers of the loan. However, remember that eligibility criteria for credit life insurance, along with top ups and riders, differs across plans and insurance providers.
Things to Know Before Buying Credit Life Insurance Cover
Credit insurance benefits both businesses and individuals, especially when:
You are not in the best of health, since no medical tests are required.
You do not have enough life insurance that can pay off your debts.
By choosing to protect the loan’s co-borrower, you will also relieve them of the responsibility of having to repay the loan in your absence or due to your disability.
Credit insurance offers loan default protection on personal loans, student loans, credit card loans, and open lines of credit. These are extremely helpful if you have parents, spouse and/or children who rely solely on your income. Compare credit insurance benefits from multiple insurance providers for an informed decision.
