Loan protection insurance, also known as loan insurance or payment protection insurance (PPI), is a type of insurance policy that helps cover loan payments if you experience certain unforeseen circumstances that make it difficult to repay the loan. It acts as a safety net, ensuring your loan is taken care of even if you’re unable to make payments due to things like job loss, disability, or death.
Here’s a more detailed explanation:
What it covers:
- Job Loss:
If you lose your job involuntarily, the insurance may cover your loan payments for a specific period.
- Disability:
If you become unable to work due to a disability, the policy may help with loan repayments.
- Death:
In the event of your death, the insurance would pay off the outstanding loan balance, preventing your family from inheriting the debt. - Critical Illness:
Some policies also cover loan payments if you’re diagnosed with a serious illness.
How it works:
- You purchase the insurance policy when you take out a loan.
- You pay a premium for the policy, either as a lump sum or through your monthly loan payments.
- If a covered event occurs, the insurance company will make the loan payments for you, either in full or for a specified period.
Benefits:
- Peace of Mind:
Loan protection insurance can offer peace of mind, knowing your loan will be covered if something unexpected happens.
- Financial Protection:
It protects your family from the financial burden of repaying the loan in the event of your death or inability to work.
- Credit Score Protection:
By covering loan payments, it helps prevent defaults, which can harm your credit score.
- Tax Benefits:
Some policies may offer tax deductions on the premium paid.
The concept of loan insurance is identical to that of life insurance. The latter protects your family by paying a lump sum in the event of death or disability, whereas the former pays monthly EMIs on your behalf in similar circumstances, up to a certain period. This type of insurance is available in the market for various loan products. You can purchase it to cover personal loans, home loans, car loans, credit card bills, and mortgage loans, among other things.