As a consumer, you probably need a loan for buying a home or a car . But do you know that you can secure your loan with an insurance cover? Loans are a valuable resource, empowering us to fulfil our dreams and meet our financial needs, or as we call it ‘the certainties of life’. Whether you take a home or a car loan, or an educational loan to fund your child’s studies abroad, or even a personal loan to finance your vacation, lenders offer an insurance policy called a credit life cover on all such retail loans. Such a cover will shield you and your family from the burden of unpaid debt in case of a contingency. It's a product that’s crafted to protect the interests of both borrowers and lenders.
Let’s take a look at what credit life insurance is and why you should use it.
What is Credit Life Insurance?
Credit life insurance is a group cover that acts like a safety net for borrowers and lenders. Lenders typically club a credit life cover with the loan, offering it to borrowers at the loan processing stage itself. In the case of small-ticket personal loans, lenders often add the cover to the loan amount so that the EMI includes the credit life premium and loan instalment.
The mechanism is straightforward: the policy gets activated in case of an unforeseen event so that the insurance company settles the outstanding loan amount with the lending institution. By doing so it ensures that the loan is not passed on to the borrower’s family, effectively relieving them from the burden of repayment.
Two Forms, One Purpose: Group credit life come in two variants — flat cover and reducing cover—each tailored to accommodate different needs and preferences. The flat cover insures the entire loan amount for the entire period of the loan. Since the cover is for a fixed amount, equivalent to the initial loan amount, it carries a higher premium. In case of an eventuality, the insurer pays the entire loan amount – it settles the outstanding balance with the lender and pays the remaining portion to the borrower’s family.
The reducing credit life cover, on the other hand, is synchronised with the reducing loan balance. Hence, it carries a lower premium. When activated, the insurer only clears the lender’s remaining dues.
The borrower must, however, choose the coverage option at the outset while taking the loan.
Why Secure Your Loans with Credit Life Insurance?
Credit life insurance offers several benefits to borrowers, such as:
Financial protection for the family:
Since a credit life cover ensures that the outstanding loan is settled by the insurer in case of an exigency, the lender does not pass on the debt to the borrower’s family. Hence, it provides a valuable safeguard as it spares the borrower’s family from shouldering the financial burden of repayment.
Security for lenders:
Borrowers can rest assured that lenders will not chase their family to repay their loan in case of an unforeseen event. That’s because the credit life cover provides protection to both borrowers and lenders. Since the insurer settles the outstanding loan amount, it mitigates the lender’s risk of non-payment and potential defaults. This also ensures that the financial ecosystem remains robust so that loans remain easily available to borrowers.
Smooth clubbing of insurance premium and loan amount:
Credit life insurance is not an afterthought but an integral part of the borrowing journey. Since the cover is provided along with the loan, lenders often add the premium to the EMI in small-ticket retail loans. This smoothens the process for borrowers as they repay the loan and service the insurance policy, simultaneously. In some cases, insurers like IndiaFirst Life Insurance offer plans that cover up to 120% of the loan amount. This helps to shield the borrower in case the loan amount increases if the unpaid interest sums get capitalised[AD1] [AP2] because of a moratorium.
The Role of Insurance Riders
Like with other life insurance policies, in the case of credit life cover too, borrowers can opt for add-on features or riders to enhance their protection. They can choose from the following riders:
Critical illness rider:
This offers specific coverage for critical illnesses. If the insured person is diagnosed with a covered condition, they receive an additional benefit to cover their loan.
Accidental riders:
These cover the loan amount in case of accidental demise, dismemberment, or disability from unforeseen events.
Spouse rider:
These provide additional cover to spouse of the borrower.
Moratorium cover:
When lenders offer a moratorium on loan repayments, such as during the pandemic, the interest amount may get capitalised, increasing the loan amount beyond the original sum covered. A moratorium feature provides a shield against this.
In the world of retail loans, credit life insurance is a win-win solution for everyone. It creates an ecosystem where the interests of borrowers, their families, and lenders are protected at the same time. The financial well-being of all parties is considered, fostering a sense of security and mutual benefit.
As Indian consumers increasingly seek a range of personal, home, vehicle, education, and other retail loans to meet their needs and desires, it is important that they secure their borrowings with a credit life cover and shield their families from inheriting their debt in case the unforeseen occurs.
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