What is personal loan insurance?
Personal loan insurance has many names: Credit Insurance, Payment Protection Insurance (PPI), Loan Shield Insurance and many others. This insurance is designed to cover the policyholder’s outstanding loan in the event of unforeseen circumstances such as loss of a job, sudden disability etc. The most common events covered under such policies are often unemployment, disability and death; however, the terms of the policies may vary depending on where it is offered and by whom.
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What does it mean for the customer?
If you currently have an outstanding loan and an event that is protected under the personal insurance loan occurs (e.g. you lose your job), this policy may cover your debt payments up to a certain prearranged amount and prevent you from defaulting on your loan. They will pay either whole or part of the monthly installments on your behalf for a period lasting anywhere between 6 – 24 months.
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Is everyone eligible for a personal loan insurance coverage?
That depends. Some institutions offer a standard policy that is provided regardless of your age, gender or other factors. Most policies, however, are restricted to an age group of 18 – 65 year olds, residency in the UAE, continuous employment and exclude coverage if the event occurs as a result of the insured’s detrimental habits such as alcohol or drug abuse, smoking habits etc. Needless to say, cheaper standard policies may cover only a small amount of your outstanding balance, if the unexpected event occurs.
What are the costs associated with a personal loan insurance?
As with every insurance policy, a monthly charge will be added to your loan payments as a premium. Some banks charge a one-time fee during the inception of the loan on the total amount. The fee amount could differ significantly based on factors such as your age, health, gender and how much coverage you need. Generally, loan insurance ranges between 1% and 1.25% of the loan amount.
Most often, this insurance is sold at the time the loan begins. You may choose to wait and get the coverage at a later date and save several hundreds in premiums.
Is this insurance mandatory for all borrowers?
Not at all! This is primarily an optional coverage that is offered to borrowers by the Bank. There is no mandate by the Central Bank or other regulatory body that every borrower must purchase Personal Loan Insurance.
What does it mean for the loan provider?
Banks and other loan providers often team up with insurance companies to provide this loan. Just like the customer, the bank is also covering themselves from potential loss due to non-payment from the borrower.
The bank does not directly gain from the premiums paid by the borrower (that goes directly to the insurance company). Nonetheless, by encouraging the borrower to get insurance on the loan, they protect themselves against future losses too.
Some things to consider
Ensure that you read your policy carefully. Pay particular attention to when the coverage begins. Policies may often say that claims can only be submitted after 60-90 days of unemployment or disability. This means that you would have to pay the outstanding loan for three months on your own before you can submit a claim.
Keep in mind that your coverage is with the insurance company and not the bank. Therefore, before you sign up for coverage, ensure that the insurance company is a reputable and credible organization.