More cover for a top-up loan?

Taking a term plan equal to earlier loan ensures that the requirement of additional insurance isn't high

Suppose you take a cover for a home or personal loan and after a period of repayment, you need another loan. If it is a personal loan, often, the same lender might offer another loan, even at a cheaper rate.

But what happens to the insurance scheme? If you take a policy with depreciating cover, in which the cover keeps falling with the lower repayment amount, there is a gap between the cover and the new repayment amount.

V N Kulkarni of debt-counselling centre Abhay says ideally a loan-protection cover isn't mandatory, as banks can't sell ‘bundled’ products, according to Reserve Bank of India norms. But most lenders suggest one take cover with a loan. Kulkarni says this is a hedge against any unfortunate incident to the borrower.

In case of an extra amount, when there is a gap between the repayment amount and the existing cover, one can opt for a top-up cover to make good the difference. For personal loans, banks often offer a new policy. But you should insist on a cover only for the top-up; else, the earlier policy will be cancelled and the premium paid wasted.

You could also take a term policy for an amount equivalent to the loan. In this case, as the amount is not depreciating with the fall in the loan amount, it will provide cover for the entire amount if the top-up loan does not exceed the loan amount. Kulkarni says: "It is better to ensure the insurance covers the entire liability. Banks have insurance as a condition to sanction loans because they want the recovery process to be smooth. They want to avoid getting into Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) and selling the property."

Usually, lenders insist on cover for a home loan. For personal loans, typically, banks don't insist on insurance, as the amounts are smaller — Rs 50,000-3 lakh. But if you take a second personal loan, the lender might insist on increasing the insurance cover, says Gaurav Gupta, chief executive of My Loan Care. Insurance covers are important, specially for those with liabilities such as houses, personal loans or car loans. Being a little smart while raising the loan amount and calculating the new requirement when the liability increases ensures there is a strong hedge in case of any untoward incident.

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