Credit-linked Insurance Policy is a type of insurance that helps pay off your debts in case of an unfortunate event like death, disability or unemployment. Unlike traditional insurance plans, credit-linked Insurance ensures repayment of the loan or debt on your behalf should you face such circumstances in your life. Learn more about the credit-linked insurance policy on this page below and know how it works.
Credit Linked Insurance Operational Methodology
Credit-linked Insurance Policy is offered by banks, lenders, credit card issuers when you borrow a loan or a line of credit. This is an affordable way to protect your family from debt in case of your unfortunate death as the policy will cover your outstanding loan amount. If your spouse or someone else is a co-signer on your loan, this policy will prevent the concerned from making loan payments after your death.
Types of Credit Linked Insurance Policy
If you search for a Credit Linked Insurance Policy, you’ll come across the following five types of credit insurance plans-:
- Credit Life insurance: Under this type of credit-linked insurance, the insurer will pay off the borrower’s outstanding debts in case of death during the policy term. The credit life insurance policy value decreases proportionately with the outstanding loan amount as the loan is paid off over time.
- Credit Disability Insurance: In case you are disabled due to illness or injury during the policy term and it affects your income, Credit Disability Insurance will make monthly payments of your loan. You don’t need to get hospitalized to receive benefits under this policy, but the doctor must confirm the disability in writing.
- Credit Involuntary Unemployment Insurance: Credit Involuntary Unemployment Insurance (IUI) pays your loan EMIs up to a predetermined period in case you lose your job with no fault of your own, including layoff, general strike, termination of employment, unionized labor dispute or lockdown. The insurer shall pay the EMIs as per the schedule, so you won’t face any debt burden in case of your unfortunate unemployment.
- Credit Property Insurance: This credit-linked insurance protects the personal property which the insured has used to get the loan. The insurer shall pay benefits under this policy in the event of theft, accident or natural disasters like earthquakes, floods, tornadoes, etc.
- Trade Credit Insurance: Under this type of credit-linked insurance, you’ll get financial protection for your businesses against the risk of clients who don’t pay because of insolvency and any other events.
How is the Credit Linked Insurance Policy Premium Calculated?
Your premium amount will depend on various factors such as the loan amount, types of credit and the type of policy. The premiums can be paid either in single or monthly payments.
Monthly Payment – This method is usually available in the case of credit cards, home equity loans and other types of similar debts. There are two categories under this mode of payment:
- Open End Account: The premium amount needs to be paid monthly and it will be based on the monthly debt.
- Closed-End Account: The premium amount remains fixed and does not vary with the debt amount.
Single Payment – The premium amount is calculated at the time of policy inception and you need to pay the premium in a lump sum.
Important Notes About Credit Linked Insurance Policy
- Credit linked insurance is a specialized type of life insurance policy designed to pay off specific outstanding debts in case of the borrower’s death
- Credit linked insurance policy term will be the same as the loan term
- Maturity and decreasing death benefits shall be reduced based upon the outstanding loan amount over time.
- No medical examination is needed