Imagine this scenario: Radhika, a marketing professional in her early 30s, decides to renovate her home. She applies for a ₹5 lakh personal loan, confident in her ability to repay it with her stable income. However, six months into her loan tenure, an unexpected job loss upends her financial stability. Struggling to keep up with EMIs, she realises she should have considered an often-overlooked financial product: personal loan insurance.
If you’re contemplating a personal loan like Radhika, you might wonder, ’Should I get my loan insured?’ Let’s delve into how personal loan protection insurance (PPI) works, its benefits, and whether it’s worth your consideration.
What Is Personal Loan Insurance?
Personal loans don’t come with inherent insurance, but personal loan protection insurance or loan repayment insurance acts as a safeguard. It protects borrowers from financial strain by covering their loan repayments under specific circumstances, such as:
· Job loss
· Temporary or permanent disability
· Critical illness
’Personal loan insurance serves as a financial cushion during unforeseen circumstances,’ explains Abhay Asknani, a chartered accountant. ’It’s particularly useful for those with high loan amounts or unstable income sources.’
How Does Loan Insurance Work?
Loan insurance functions like any other insurance policy. You pay a premium that can either be:
· Paid upfront as a lump sum, or
· Spread out over your monthly EMIs, making it more manageable
The cost of this premium depends on several factors:
· Loan amount
· Tenure
· Age
· Health status
For instance, if Radhika had opted for PPI, her insurance might have covered her EMIs until she secured a new job, preventing her from defaulting and damaging her credit score.
Why Premiums Vary: Breaking Down Costs
Several elements influence the premium amount, including:
· Loan Size: Larger loans carry higher premiums because the financial risk is greater.
· Loan Tenure: Longer repayment terms reduce EMIs but increase premiums due to prolonged risk exposure.
· Age and Health: Borrowers above 50 often face higher premiums as income stability can waver post-retirement. Those with chronic or critical illnesses may pay more due to increased risk.
’Insurance companies assess risk meticulously,’ says Asknani. ’Borrowers with stable incomes and healthy profiles are rewarded with lower premiums. On the other hand, older borrowers or those with health conditions might find the premium a bit steep.’
Where To Buy Personal Loan Insurance
· From the Lender: Many lenders offer PPI alongside personal loans, simplifying the process.
· From a Third-Party Insurer: This option allows you to compare policies for better coverage and premiums.
Each option has pros and cons. Lender-provided insurance may be more convenient but could limit customisation. Third-party providers, on the other hand, might offer tailored policies and competitive rates.
’Think of personal loan insurance as a safeguard for your financial future,’ suggests Asknani. ’Even if it seems like an additional expense, it can protect you from heavy financial burdens during tough times.’ However, if your loan amount is small and your income is stable, the added expense of insurance might not be necessary.
If you’re planning to take a personal loan, evaluate your risk factors and consider whether personal loan insurance is the safety net you need. After all, as Abhay Asknani aptly puts it, ’A little preparation today can shield you from big worries tomorrow.’