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Personal loans can cover everything from debt consolidation to medical bills, house renovation, children education, marriage in family, or even major life events like adoption or a wedding, business support requirements, etc. Availing loan is helpful to take care of such situation and keep the family happy and going. Also help business to handle financial challenges and boost the growth.

While availing the loan is a good option to take care of personal and business requirements, its equally important to safeguard the family from any financial burden of loan repayment, incase of the unforeseen death of the borrower or borrower meeting some major accident; incapacitating his earning capability (most of the case key earning member). In such cases the borrower and or his (her) family fall in big challenge of repayment of loan. Repayment of loan in those hardship time is extremely painful and challenging. Thanks to Insurance company and loan company, providing such insurance protection coverage to the borrower to handle such tough time.

In case of the loan protected by Insurance, subject to type of insurance coverage taken, in such eventuality, the payment loan amount is being taken care by the insurance companies. No burden remain for payment of loan on the family of deceased borrowers in case of his death or on the borrower himself, in case of his major loss of earning capability due to an accidental reason. The benefit of such insurance coverage is available to all subject to payment of a small insurance charges (fee). Now a days most of the organised FinTech are providing such facilities as a part of their loan disbursement agreement.

The loan insurance product should be taken according to need of the borrower. Credit insurance is optional. There are four varieties of credit insurance: -

• Credit Life: If you pass away before repaying all your loans, this policy pays off either some or all of your remaining balance.
• Accidental coverage (Credit Disability): This is sometimes referred to as accident and health insurance, which gives you temporary relief from making payments if you can't work for health reasons.
• Involuntary Unemployment (involuntary loss of income): If you get laid off or lose your job, this policy can cover your loan payments for a while.
• Credit Property Insurance: When you use personal property as loan collateral, this insurance protects the borrowers incase something happen wrong to the property, like damage from Fire, etc.

Debt protection is a contractual agreement between financial institution and the borrowers to cancel or suspend all or part of the remaining obligations to repay loan due to death or temporary or permanent disability as well as involuntary unemployment (in some cases).

How financial institutions insure their loan?
The cost of Insurance is being added to the price of a loan, either by interest rate adjustment or charging insurance coverage charges separately as a part of processing fees or alike. Credit life insurance is a life insurance product designed to pay off the borrower's outstanding debts. If the borrower dies, the face value of a credit life insurance policy decreases proportionately with the outstanding loan amount as the loan is paid off over the time, until value reaches zero.

For eg: Mrs. Sharma (a hypothetical name), a working woman in a private organisation, took a personal loan of Rs. 3,00,000/- for family event for a tenure of 2 years and got it insured from an Insurance company. She was paying all her dues on time and her credit rating was good.

Suddenly time took it's turn, and she met with an accident while going to her office. Mrs. Sharma was intelligent, she had taken loan protection insurance coverage, on her demise all remaining loan installments were taken care by the insurance company and family was saved from any further hardship for payment of loan.

What happens to personal loan debt after the borrower passes away?
On the intimation of death of the borrower by the family members, a claim form is filled with basic information's;

• Name
• Address
• Age
• Date of death
• Reason of death
• Death certificate issued by competent authorities
• In case of accident an additional documents of police FIR is also required
• Name of the nominee and relationship with borrower
• The insurance company on completion of paperwork and cross examination of documents pays to the nominee of the borrower

Taking a personal loan insurance is always a recommended option. Insurance claim process in India is very quick and simple. majority of companies pay their claims with in the approved turn around time.

The author is operational head of www.omlp2p.com, an RBI registered p2p lending platform. The article (blog) written by him is in his personal capacity and education in nature. All the views are personal views of the writer. www.omlp2p.com, the peer to peer lending platform has placed the articles to benefit the general borrowers and lenders through an exercise of educational efforts of the lenders.