Loan Insurance Vs Life insurance
In one of the Financial Wellness programs organised by Finmapp for the employee’s of a corporate , one of the employees asked me about NBFC/Banks approving Home loans insist on take insurance cover on the loan amount approved . Why ? Is it benefi- cial for the borrower to take this insurance even if He/She has a life insurance ? Should we inbuilt the premium amount on the EMI by taking the insurance premium too on loan or pay the premium upfront ???
Below is my take on that
Banks/NBFC though insist on taking insurance cover on the loan amount but its not compulsory for the borrower to take it . Its upto their discretion . However they do insist for the same because in case of death or critical illness to the borrower the out- standing loan amount is paid by the insurer instead of burdening the co - applicants (Usually spouse or any blood relatives ) which is a good practice and is beneficial to both
Is it beneficial for the borrower to take this insurance even if He/She has a life insurance ?
While calculating how much life insurance is needed at different stages of life , one of the important criteria to be taken into account is amount of debt you have . If your life insurance /Term plan covers the outstanding debt then you don’t need to take loan in- surance cover . If not then it all boils down to which is cheaper & better option for you , taking Loan insurance cover or increasing your life insurance cover to the amount of loan you are taking .
To give you a better perspective below is the table showing which is a better option for you assuming the following
- Loan amount - 1 cr
- Tenure - 15 yrs
- Interest on Home loan - 8%
Assuming most of the Bank & NBFC loan insurance premium is approx. 4% of the loan amount (Age below 40yrs) & 8% if you are above 40 yrs of age . Bank/NBFC will offer you to either pay premium upfront or they include the premium amount on the home loan amount and you need to pay them in EMI which is then in -built on the HL EMI .
Clearly the below table shows that its better to take additional Life insurance cover ba- sis the loan amount than go for loan insurance cover offered by Banks/NBFC represen- tatives .