When taking a loan, borrowers may also be offered loan protection insurance, commonly known as credit-life insurance. The policy is designed to cover some or all of the outstanding loan amount if the borrower dies or faces certain unforeseen circumstances, such as disability, critical illness or job loss, depending on the terms of the policy.
Lenders may suggest loan insurance based on factors such as the loan amount and the borrower's profile. However, the policy comes at an additional cost, which can increase the overall expense of borrowing. Before signing up, borrowers should check what the policy covers, its exclusions and premium, and calculate how it affects their total repayment.
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Loan Insurance: Key Things Borrowers Should Know
- Loan insurance is not mandatory: Borrowers should know that loan protection insurance is not a universal requirement for getting a loan in India. If a lender insists that it is compulsory, ask for the requirement in writing and verify the terms before agreeing.
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- Lenders cannot force you to buy a policy: Insurance should not be bundled with a loan without the borrower's explicit consent. This applies to banks and non-banking financial companies (NBFCs). Borrowers should also not be pressured into buying investment products or deposits as a condition for obtaining a loan.
- Separate consent is required: Agreeing to a loan does not automatically mean agreeing to buy insurance. Borrowers should be given a clear choice and provide separate consent for the policy, rather than having insurance added through a single pre-checked box.
- You can choose your insurer: If you decide to buy loan protection insurance, check the available options. A lender should not force you to purchase a policy from a particular insurer.
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If a lender continues to insist on insurance, ask for the requirement in writing and raise the matter with the bank's grievance redressal cell. Borrowers can also approach the appropriate regulator or grievance forum, depending on the nature of the complaint.
The Insurance Regulatory and Development Authority of India (IRDAI) has proposed reforms relating to insurance distribution, including greater transparency around insurance products. Borrowers should review the policy terms and applicable rules before signing up, so they understand the additional cost and are not paying for coverage they did not intend to purchase.
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