If you’ve applied for a home loan, personal loan or business loan recently, you may have noticed that many banks and NBFCs strongly insist on loan insurance. In some cases, it feels almost mandatory.
But why is this happening?
Loan insurance — often called Loan Protection Insurance (LPI) or Credit Life Insurance — protects both the lender and the borrower. As risks rise in the lending industry, banks are tightening their policies to secure repayments.
Here’s why loan insurance is becoming a standard requirement.
1. Rising Default Rates
Over the past few years, defaults in unsecured loans, credit cards and personal loans have increased.
To reduce losses, banks prefer that borrowers take insurance so the outstanding amount is covered if the borrower:
Loses job
Dies unexpectedly
Suffers disability
Faces major illness
Has income interruption
With insurance, banks recover dues without legal complications.
2. Regulatory Focus on Risk Management
Regulators encourage banks to maintain healthier books.
Loan insurance helps lenders:
Reduce Non-Performing Assets (NPAs)
Manage risk better
Protect borrowers’ families
Ensure smoother recovery
This is why many banks indirectly push customers to opt for loan protection.
3. Growing Borrower Protection Awareness
Banks have started highlighting how loan insurance prevents families from being burdened with EMIs if something unexpected happens.
Loan insurance protects you from:
✔ Huge unpaid loan amounts
✔ Legal notices
✔ Credit score damage
✔ EMI pressure during emergencies
With rising medical and financial uncertainties, insurers and banks promote it as a safety shield.
4. Mandatory for High-Value Loans
For big-ticket loans like home loans or business loans, lenders prefer insurance because the risk is higher.
Banks often tag insurance as “recommended” or “policy requirement” for:
Home Loans
Mortgage Loans
Large Personal Loans
Business Loans
This reduces bank risk in long-tenure lending.
5. Helps Banks Recover Loans Smoothly
If something happens to the borrower, insurance covers the outstanding amount immediately.
Banks avoid:
Long legal recovery
Collateral seizure
Family disputes
Delayed repayment
This makes the system smoother for both sides.
6. Bundled Products Boost Bank Revenue
Many banks partner with insurance companies.
Selling loan insurance earns them:
Commission
Cross-sell revenue
Better profit margins
This is another reason loan insurance is promoted strongly.
7. Borrowers Prefer Peace of Mind
A growing number of customers choose insurance voluntarily because:
EMIs are already high
One medical emergency can disrupt finances
Family should not suffer loan pressure
This trend has allowed banks to make insurance more widespread.
Is Loan Insurance Really Mandatory?
Technically: NO, banks cannot force you.
Practically: Many banks make it a strong condition for approval, especially for high-risk borrowers.
You can ask for:
Other insurer options
Lower premium
Single premium vs EMI-based plans
But some NBFCs link loan approval to insurance for risk reasons.
Pros of Loan Insurance
✔ Protects your family
✔ Prevents EMI burden during crisis
✔ Keeps your credit score safe
✔ Ensures smooth loan closure
✔ Avoids legal recovery and collateral seizure
Cons of Loan Insurance
✘ Increases total loan cost
✘ Some lenders charge high premiums
✘ Not always needed for low-value loans
FAQs
Q1. Is loan insurance compulsory for all loans?
Not legally, but many banks insist on it for safety and risk management.
Q2. Can I refuse loan insurance?
Yes, you can — but some lenders may link it with loan approval or pricing.
Q3. Which loans most often require insurance?
Home loans, business loans and large personal loans.
Q4. Does loan insurance cover job loss?
Some policies do, depending on the plan.
Q5. Does it help my credit score?
Indirectly — it prevents missed EMIs in emergencies, protecting your score.
Published on : 15th November
Published by : SMITA
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