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Insure safe future with creditor protection plans - The Economic Times

16 November, 2009

THIS is a tear-jerking scene that's been done to death in India cinema, irrespective of whether you're talking of Bollywood or Tollywood: A gentleman with a huge loan liability dies. After the funeral, his wife and children are hounded by people from the bank. With no options to pay back the outstanding debt, the house is seized by the bank and the family is forced out onto the streets. If you haven't changed the channel throughout this scene, then you'd probably spend a moment wondering what if this were to happen to you, only to chide your-self for your negative thoughts. There are, however, op-tions to tide you over all such eventualities. Given the fact, that loans are generally long-term liabilities that may become difficult to repay if the bread-winner dies, many insurance companies have policies which are specifically meant to protect your loans. SundayET tells you a little more about what they have to offer.

While insurance companies have different names for this product, they generally go under the title of loan protection of creditor protection policies. They are very similar to term plans in the sense that they are purely risk plans and do not offer any survival benefits if the person lives beyond the tenure of the loan. The policy generally covers the outstanding loan as per the original EMI schedule that is agreed upon when the individual takes the loan from the bank or against a specific num­ber of EMIs. They are generally single premium policies and offer protection against accidental death, total or permanent disability and critical illness. "In a few cases, loss of employment may also be covered under the pol­icy but this is still in a very nascent stage," says Ajay Bimbhet, managing director of Royal Sundaram Al-liance Insurance. The premium that you will need to pay will vary depending on factors such as the age of the individual, occupation, quantum of the loan amount, tenure of the loan and interest rate.
In addition to home loans, there are other personal loans too which can be covered such as vehicle loans for both old and new vehicles as well as educational loan both for domestic and studies overseas. In rural areas, it has also been used to protect loans that have been taken to buy farm equipment like tractors. A couple of com­panies also offer policies to cover your credit card out­standing payments. However, the product is most com­mon in the home loan segment given the fact that the tenure of the loans is very long (up to 25 years) and the risk of NPA is high. "Moreover, in the existing legal framework, it is also difficult to attach (takeover) a property against the loan when a family is living in it,"says Anand Pejawar, executive director of marketing at SBI Life Insurance. A few clarifications, however, need to be made as to how this product works. For instance, assume that a person X dies when he when he has an outstanding debt of Rs 8.5 lakh. According to the original EMI sched­ule, the outstanding amount that he has to pay at that point of time is only Rs 8 lakh and the additional Rs 50,000 had been accumulated because of defaults in earlier payments. In such a case, the insurance compa­ny will only pay the Rs 8 lakh which is mentioned in the original schedule. The reason behind this is that most companies want to safeguard themselves against the possibility of wilful default on the part of the insured person.