Insurance sold with loans: Good or bad?

Bundling insurance with a loan has become an integral part of the sales pitch of most of the banks. While sanctioning long-term or unsecured loans, bankers advise customers to buy insurance to cover the risk of borrower’s death during the tenure of loan.

These insurance plans are used to protect the borrower as well as the bank in case the former is not able to pay EMIs of his loan.

In case of death or disability of the principal borrower, the financial condition of his family can go haywire and it may become difficult for family-members to pay the outstanding loan.

Such a situation can also pose a risk for the lender, as its cash flow may get affected. To meet such an eventuality, borrowers are advised to get their liabilities insured.

While an insurance cover on your liabilities is always good, there are a number of points to keep in view:

• Banks have tie-ups with insurance companies. So, they may push for products that may not provide you adequate cover or are not cost-effective.
• Loan insurance policies are third-party products. Banks get commission for selling policies to customers. There is a possibility that you may be given an insurance cover even though you may not require one.
• If your bank is adding your premium amount to the loan amount, your EMI will go up.
• Single premium insurance with a lump sum payment may sound attractive but you may end up paying more. In case you are in a position to prepay your loan, you would be paying huge premium for a short-term cover.

Single premium vs Annual premium

For illustration purpose only)

• If during the course of your loan payment tenure, you decide to opt to transfer your loan to a new bank, you will also have to transfer your insurance policy which may be a cumbersome process.

Term plan or loan insurance?

Loan insurance is similar to any other insurance policy. The only difference is that the insurance company settles the claim with the bank instead of paying to the nominee. In case of a term cover, the nominee gets the money and closes the loan with the bank.

You should prefer term plan to loan insurance as it is cost-effective and can cover all your liabilities, including loans. If you are adequately insured, you will be able to meet any financial emergency.

Loan insurance cover is linked to your outstanding loan. As your outstanding amount goes down, the sum assured also reduces. In term plans, the sum assured is fixed irrespective of the stage at which the claim is being made.

Generally, loan insurance is costlier than term plans. Term plans entail regular premiums while loan insurance normally charge single lump sum premium. Even if your bank is offering a discount on lump sum premium, still it may prove to be costly.

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