Summary of this article
Borrowers need not buy insurance offered by their lender
Lenders may require insurance for financed homes or vehicles
Adding insurance premiums to loans means paying interest on them
Compare cover, exclusions, and claim terms before buying loan insurance
When you take a loan, the lender may offer insurance alongside it. The policy could protect a house or vehicle bought with the loan, or repay the outstanding amount if the borrower dies. But does accepting the loan mean accepting the policy?
Banks are already barred from forcing customers to choose a particular insurer or linking insurance sales to a banking product. The Insurance Regulatory and Development Authority of India (Irdai) has now proposed curbs on compulsory bundling by banks and non-banking financial companies (NBFCs) that distribute insurance. Its proposals have yet to be finalised.
When Is Insurance Needed?
A lender may require a borrower to keep a financed home or vehicle insured to protect the asset against which it has lent. Motor third-party insurance is mandatory even if the vehicle was bought without a loan. A policy covering the borrower’s life serves a different purpose; buying one is not automatically a condition for a personal loan.
“The lender may ask you to keep the house or vehicle insured, since that protects the loan. But one can buy that insurance from any insurer of your choice and not necessarily from your lender,” says Manish P. Hingar, chartered accountant, founder and chief executive officer, Fintoo, a Sebi-registered investment advisory firm focused on financial planning, investment advisory and tax planning.
Ask the lender exactly what cover it requires and whether a policy you already hold meets that condition. If you need a new one, compare policies on their cover, exclusions, claim process and premium.
“A policy can be purchased from wherever it suits you the best. Your choices range from the lender, agent, online or directly from an insurer. The lender may ask you for a minimum cover amount,” says Hingar.
Minoo Mantri, executive vice president – insurance, Anand Rathi Share and Stock Brokers, also says borrowers can choose the insurer. He suggests looking beyond the loan balance when deciding how much life cover to buy: a family may need money for its living expenses after the debt is repaid.
What Will The Policy Cost?
Find out whether the premium is payable upfront, each year or as part of the loan. Adding it to the loan means paying interest on it. If the lender offers a lower loan rate when you buy insurance, compare the total amount payable with and without that policy.
“If it is added to the loan, you will pay interest on it. But importantly, the lender needs your explicit consent to do so. One needs to make sure the policy offers enough cover,” says Hingar.
Mantri says the borrower should buy cover equal to the outstanding debt when choosing mortgage redemption insurance. For life cover, he recommends accounting for the family’s wider financial needs too.
“Ideally, it is advisable to buy an insurance/ sum assured cover that takes care of both the loan amount as well as the economic replacement arrived at by the human life value (HLV) approach,” says Mantri.
Before signing, check the exclusions, free-look period and what happens if you repay the loan early or switch lenders. Ask whether the cover decreases as the loan is repaid. If there is a claim, find out how much goes to the lender and whether any balance goes to your family.
FAQs
1. Must I buy the insurance offered with my loan?
No. A lender may require you to insure a financed home or vehicle, but you can choose a policy from another insurer that meets its requirements.
2. Is life insurance compulsory for a personal loan?
No. A lender may offer loan protection insurance, but taking it is not automatically a condition for a personal loan.
3. What if the insurance premium is added to my loan?
You will pay interest on that amount. Ask for the premium separately and compare the total loan cost before agreeing.
