Opting for moratorium? Your insurance may not cover the extended period

Have you opted for the three-month moratorium on your loan repayment allowed by your bank or lender? Then, the credit-linked life insurance policy that covers your loan liability in the event of your death, may not be available for the extended period of the loan on account of availing the moratorium.

Credit life policies are essentially group policies issued by life insurance companies to financial institutions that ensure that in case of death of the borrower, the amount of loan outstanding (or the chosen sum assured) is paid out by the insurer. While on the one hand it benefits banks and other lending institutions from defaults (NPAs) in case of the death of the policyholder, on the other, it offers comfort to the borrower’s family, by lowering their burden of loan liabilities.

Opting for the three-month moratorium on equated monthly instalment (EMI) payments falling due between March 1 and May 31, will lead to an increase in the tenure of your loan. But your credit life policy will not cover you for the extended period, according to various insurers.

The cover

A credit-linked life policy is arranged on a group basis, with banks or other lending institutions as the master policyholder. For a borrower to be covered under the policy, he/she must join the group insurance scheme ― essentially becoming a scheme member.

On the death of the borrower, the life insurance company will pay the outstanding loan amount (or sum assured). The borrower can authorise the master policyholder (the bank) to receive the claim proceeds. If not, then the claim payment will be made in the name of the borrower or his/her nominee(s), even if the cheque is sent to the master policyholder (the bank) for administrative convenience.

The premium is determined based on the original loan repayment schedule (or opted sum assured), duration of the cover, and age of the borrower, among others. These policies are essentially single premium policies, and the premium is usually taken upfront by the insurer, at the time of availing the loan. While sometimes the premium may be built into the EMI loan payments, banks usually prefer the upfront option as borrowers may switch loans between banks mid-way of the loan tenure. Even for a borrower, an upfront payment works better as an EMI option would imply additional burden (on account of interest charged).

Hence, given that the premium is determined at the time of taking the loan based on various factors and is paid upfront, the extended tenure of the loan owing to the (currently available) moratorium, will not be covered by the policy.

Loan extension

If you opt for the EMI moratorium available for payments falling due between March 1 and May 31, remember your bank will continue to charge you interest on the outstanding loan amount at the rate applicable during the moratorium period. This interest will be added to your principal amount and will lead to increase in the tenure of your loan. In case of big-ticket loans such as home loans, the loan tenure could get extended significantly.

For instance, in case of SBI, if you have a home loan of ₹30 lakh with a remaining maturity of 15 years, opting for the moratorium would imply eight additional EMIs (net additional interest of ₹2.34 lakh).

Your credit life policy however, will not cover you for this extended period (beyond the original 15 years). This means that the burden of additional EMIs (during the extended loan tenure) on account of the moratorium, would fall on your family in case of any eventuality.

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