Your mind might be overwhelmed and confused to know that personal loans have a complex financial history. You need to understand it very well, particularly insurance.
In Canada, when we get a personal loan, we have the option, and sometimes are required, to purchase insurance on the loan.
The purpose of this insurance is to protect both the borrower and the lender, but you may be wondering when and how it kicks into gear.
In this blog, we take you through the basics of Personal Loan Insurance Coverage and the advantages of a Loan Protection Insurance Plan.
Understanding Personal Loan Insurance
Personal Loan Insurance in Canada is a form of safety net and is intended to cover loan payments in certain situations including illness, injury, loss of employment, or death. In other words, it makes sure that the borrower or his family does not have to bear the bike loan repayments during the challenging times.
The Types of Personal Loan Insurance Cover
Personal Loan Insurance Covers usually come in three main categories:
- Life Insurance: This cover makes sure that in case the borrower dies, the outstanding loan balance is cleared from their estate or family.
- Disability Insurance: Insures a borrower who becomes disabled. This type of insurance is used to cover the balance of a loan in the event that the insured cannot make their payments.
- Unemployment Insurance: If the borrower loses their job (and it is not their fault), this insurance will pay loan payments for a specific number of months.
Each of these covers is designed to cater to specific eventualities, ensuring borrowers are protected across various life events.
How a Loan Protection Insurance Plan Works
Companies in Canada will offer you a Loan Protection Insurance Plan with a personal loan. The insurance is directly tied to your loan amount and term, covering only the loan balance and only for the duration of the loan term.
Here is how the process usually goes: if an insured event occurs (e.g., the death of the borrower, disability, unemployment), the insurance provider will either take over the monthly loan payments on behalf of the insured (in cases where disability or unemployment is covered) or pay off the remaining loan balance in the event of the borrower’s death.
The Benefits of Loan Protection Insurance
- Safety: The most important benefit is the safety it offers. It can help reduce financial stress knowing that your loan payments will be covered if something happens.
- Asset Protection: It protects your assets (savings and property) that would otherwise have to be used for making loan payments in tough times.
- Security to Families Against Financial Burden: In case of the borrower’s death, no financial load will be imposed on the family to repay the debt.
Is Personal Loan Insurance Mandatory?
Canadian borrowers are not legally required to take Personal Loan Insurance. However, it might be strongly encouraged by your lender.
Borrowers need to balance the costs and benefits for their own situation, based on their financial stability and risk factors.
Costs Involved
Personal Loan Insurance may be more expensive than individual insurance. The cost depends on the loan amount, the borrower’s age, and the types of coverage selected.
Typically, the premium is added to the monthly mortgage, making it a straightforward albeit slightly larger monthly expenditure.
Making an Informed Decision
A careful analysis of your current financial condition and future prospects is necessary to determine if it is worth taking Personal Loan Insurance. Here are a few pointers to assist you in making an informed decision:
- Assessing Your Financial Security: You should assess your financial security, including your savings and any other insurance systems that might overlap with loan protection plans.
- Personal Health and Job Status: Consider your health and job stability. Loan insurance may be more valuable to those with risky jobs or certain health issues.
- Cost-Benefit Analysis: Weigh the insurance premium against the potential benefit and peace of mind it might provide.
Real-Life Scenario
Here is a story: imagine Emma, a graphic designer who borrowed money from a bank and spent it on equipment for her home studio.
In choosing Liam to purchase a full Loan Protection Insurance Plan, Emma ended up contracting a rare and severe disease the following year, which left her out of work for a number of months.
This foresight paid off when she was unable to work for several weeks – her loan was paid off while she focused on recovering instead of feeling the added stress from not only the temporary loss of her health but also her financial security.
Exploring Claims
It is important that if you want to claim your Personal Loan Insurance then immediately you must contact your insurance service provider.
Have on hand all the documentation necessary to prove your case, like medical records or proof of unemployment. Knowing about the claims process can make difficult times less difficult.
Final Words
Personal Loan Insurance in Canada is like a shield protecting borrowers from financial turmoil caused by unexpected life events.
Yes, it is an added expense to your loan, but the peace of mind and protection it provides are well worth the cost.
Suppose Personal Loan Insurance protection fits your personal and financial circumstances. In that case, you can rest assured that you made the best decision by taking advantage of the protection that a personal loan can offer. Remember, the goal of Loan Protection Insurance is not just to protect the lender but to offer a lifeline to borrowers when they need it most.
