Dubai: If a pending loan has stopped you from changing jobs, or if uncertainty around the future of your current job has you worried about how you will pay back a loan that you took, there is a way to insure or financially guard yourself from any loss of income that you may or may not face in the future.
“If you currently have an outstanding loan and you end up losing your job or an accident hampers your ability to earn an income then an insurance against personal loan can help you to meet your monthly debts up to a pre-specified amount,” said Mirin Raul, a Dubai-based debt advisor.
“This is how you can prevent yourself from defaulting on your loan. It will take care of monthly EMIs [installments] on your behalf, in part or as whole [depending on the agreed upon terms]. However, this applies only for a period of 12 to 24 months, as these insurance policies only provide a short-term cover.”
How does credit insurance work with a personal loan?
If one of the events outlined in your credit policy takes place, such as death, disability, or involuntary unemployment, for instance, then a credit insurance policy will typically kick-in and pay all or some portion of your outstanding debt.
Most loan protection insurance policies cover certain events for a short-term period, relieving you from having to make payments for a set period. In other words, it will make your monthly debt payments for a set period of time, depending on the circumstances that triggered the claim.
The money will be paid directly to the lender or creditor. This is what makes credit insurance different from life insurance, which makes payments to designated family members or yourself. While you’re the one paying the premiums for this insurance, this policy credits lenders first.
Do you need to qualify for a personal loan insurance?
“With credit or loan insurance, lenders get the insured amount from the insurer, so there is lesser risk for the bank. This is why the insurance is offered to loan applicants on comparatively lesser stringent conditions,” explained Anil Pillai, a consumer banking analyst based in the UAE.
“Individuals who want to ensure that payments toward a credit account remain in good standing, in the event of disability or death, might benefit from credit insurance. For example, a situation when this might come up is for a mortgage on a primary family residence.” But how do you qualify for it?
The policies are offered for those who are between 18-65 years of age and also working at the time of buying an insurance policy. In order to be eligible for this insurance, policy buyer often has to be self-employed for a period of time or be employed at least 16 hours a week on a long-term contract.
Are the benefits of credit insurance well worth the cost?
Credit life insurance policies are typically less expensive than traditional life insurance policies. “This is because the coverage is limited to the outstanding debts of the borrower, rather than providing a death benefit that can be used for any purpose,” Pillai further explained.
“This makes it a cost-effective benefit. In some cases, however, the extra costs can make your loan more expensive and put you at risk of default. Also, if you have life or disability insurance, it may be more affordable than credit insurance. So compare the premium costs of policies before buying.”
So when does it make sense to get a personal loan insurance? “If you have a loan that you can’t defer, for example, or you’re concerned about debt due to a medical condition, job loss, or death, it can be an option,” advised Raul.
Why does the cost of credit insurance differ with each individual?
The amount you’ll pay for insuring against your loan or credit insurance will depend on factors like loan or credit type, the amount of debt that will be protected and the type of insurance policy and lender you choose.
Also, the cost differs with the types of personal loan insurance plans you choose to make use of. Under the ‘Single and Regular Premium Reducing cover plan’, your premium rate decreases as the outstanding loan amount goes down during the loan tenure.
The other type of policy is referred to as the ’Single and Regular Premium Level cover’, in which the premium rate remains unchanged even if the outstanding loan amount decreases. This often works out to be more expensive than the first type of loan insurance.
• A loan insurance plan must cover all causes of death and not just accidental deaths.
• It must include coverage against both permanent and temporary disability.
• The loan protection insurance plan must cater to borrowers with higher loan amounts.
• Go for a plan that allows monthly premium installments or a single lump-sum payment per your requirements.
Key takeaways
As there are instances when personal loan insurance can work out to be comparatively expensive than other insurances, it isn’t necessary for everyone. “If you’re borrowing a fairly small amount of money and have stable employment, this insurance may not be worth the added cost,” added Raul.
“However, in some circumstances, loan insurance might provide peace of mind, and be a cheaper alternative to other types of individual insurance. You will need to compare and evaluate your needs to see if personal loan insurance is worth it for you.”
As flagged by experts above, make sure you understand the maximum benefit (the most the policy will pay), what illnesses or disabilities are covered, whether the policy covers your particular type of employment, and lastly the conditions under which you may lose your coverage.
