11+ Things You Need to Know About Loan Insurance

1. What is loan insurance?

Loan insurance, also known as credit insurance, is a form of financial insurance that helps ensure the borrower's ability to repay the loan in the event of unexpected risks. If the borrower unfortunately dies or has an accident that results in permanent disability, the insurance company will be responsible for paying the remaining debt to the bank on behalf of the borrower.

Loan insurance acts as a "shield" to protect both customers and financial institutions:

• For borrowers: Helps reduce financial pressure on the borrower's family and relatives when unexpected risks occur.
• For banks: Ensures that the loan is fully paid, minimizes the risk of capital loss and increases service revenue.

With a flexible combination of protection benefits and payment responsibilities, loan insurance is increasingly recommended by banks in current credit contracts, especially unsecured loans or home loans with large loan amounts and long loan terms.

2. Loan insurance classification

Loan insurance is designed in many different forms depending on the nature and purpose of the loan to meet the diverse needs of customers. Common types of loan insurance include:

1. Consumer loan insurance

This is a type of insurance for small loans for personal spending needs such as shopping, traveling or home repairs. This type of loan insurance is suitable for short-term, low-value loans.

2. Mortgage loan insurance

This type of insurance applies to large loans with collateral, such as loans to buy a house, car or invest in a business. When taking out a mortgage, the documents proving ownership of the property are retained by the bank or financial institution, while the property remains the property of the borrower. However, when the borrower is unable to pay, the bank or financial institution will repossess this property.

If the borrower is unable to repay the loan due to risks such as death or permanent disability, the insurance company will pay the loan instead, helping to protect the collateral from being seized by the bank.

3. Unsecured loan insurance

Unsecured loans are loans that do not require collateral, usually based on the borrower's reputation or income. This form of borrowing is very popular today.

In this case, loan insurance will be similar to personal insurance. When the borrower encounters an unexpected risk leading to the inability to pay, the insurance company will pay the remaining debt on behalf of the borrower, minimizing financial risks for the bank and protecting the borrower's reputation.

3. Conditions for loan insurance

To participate in loan insurance, customers need to meet some basic conditions, depending on the regulations of the bank and the affiliated insurance company. Specifically as follows:

• Suitable age: Customers must usually be between 18 and 60 years old. This limit is to ensure that participants are cognitively capable of understanding and complying with the terms of the insurance contract.
• Have a loan at the bank: Loan insurance only applies to customers who have signed a loan contract at a bank or credit institution.
• Loan insurance agreement: The bank and the insurance company must have a joint policy, allowing customers to participate in loan insurance as part of their financial support services.

Each loan insurance policy may have differences in the age of participation, scope of protection (benefits to be paid in full or in part of the outstanding debt) as well as the insurance participation period. To ensure their rights, borrowers need to carefully read the terms of the contract, compare different insurance policies and ask questions about issues they do not understand before signing the loan and loan insurance contracts.

4. How does loan insurance work?

How loan insurance works is to provide financial protection to borrowers in the event of an unexpected incident such as death or serious injury, which prevents them from continuing to repay their debt. The borrower will be responsible for paying the insurance premium to the insurance company. When an incident occurs, if the borrower cannot repay the loan, the insurance company will pay the remaining amount to the bank or credit institution on their behalf.

However, to enjoy this insurance benefit, the borrower must also comply with the terms and conditions of the signed loan insurance contract such as:

• Having paid the insurance premium in full according to the provisions of the contract.
• Complying with the debt repayment obligation throughout the loan period and not violating the terms agreed upon in the loan contract.
• Having proof of the inability to repay the debt, such as a death certificate or injury certificate from a competent authority.

In addition, loan insurance contracts may also include some insurance limits, such as the maximum amount of insurance, the protection period or the type of risk covered. Therefore, before deciding to participate in loan insurance, borrowers should carefully study the terms and conditions of the contract to ensure that they will receive full protection in the event of an unfortunate risk.

5. Benefits of loan insurance

Loan insurance brings many practical benefits to both banks and borrowers in the loan transaction process.

Benefits for banks:

• Reduce lending risks, ensure the ability to recover capital if customers have problems repaying debts.
• Can confidently approve loans, especially for customers with unstable income or requesting large loans.
• Save on bad debt handling costs.
• Enhance reputation and ability to attract new customers to borrow from the bank.
• Can advise and provide other financial products to customers.

Benefits for borrowers:

• Financial protection in case of unfortunate incidents such as death or permanent disability, protect collateral from loss (in case of mortgage loans).
• Reduce financial burden, help families maintain a stable life.
• More peace of mind when taking out large loans, such as home loans or long-term consumer loans.
• Have the opportunity to enjoy preferential interest rates from banks when signing a loan insurance contract.

6. Is it mandatory to purchase loan insurance?

According to the following provisions in Circular 39/2016/TT-NHNN on lending activities of credit institutions to customers and related legal documents, there is no requirement for borrowers to purchase loan insurance.

“Article 15. Loan security

The application of loan security measures or non-application of loan security measures shall be agreed upon by the credit institution and the customer. The agreement on loan security measures between the credit institution and the customer shall be in accordance with the provisions of law on security measures and relevant laws”.

Therefore, the purchase of loan insurance is completely voluntary, depending on the agreement between the customer and the bank. The bank is not allowed to force the customer to purchase loan insurance. If the bank requires the purchase of insurance before the contract is approved and the loan is disbursed, this action is a violation of the law. Banks may be fined under Decree 98/2013/ND-CP, amended by Decree 48/2018/ND-CP, with fines ranging from VND 40,000,000 to VND 50,000,000. Therefore, borrowers need to clearly understand their rights and obligations before deciding to purchase loan insurance.

7. Risks covered by loan insurance

Loan insurance helps borrowers and their families reduce the financial burden when facing unexpected events. Insured risks will help protect borrowers and ensure that the debt will be fully paid to the bank.

Specifically about the types of risks insured:

• The borrower unfortunately passes away during the loan period.
• The borrower is permanently disabled in whole or in part and loses the ability to work.
• The borrower loses his job and cannot continue to repay the debt.
• The borrower suffers from serious illnesses such as cancer, stroke or other dangerous diseases specified in the terms of the insurance contract.

However, in order to receive insurance benefits when this risk occurs, the borrower must meet certain conditions such as providing documents proving health status, insurance participation period and other requirements from the insurance company. These conditions may vary depending on each contract and insurance company. Therefore, borrowers need to read the terms carefully before signing the insurance contract.

8. How much is the loan insurance fee?

When purchasing loan insurance, the borrower must pay a certain fee, called the loan insurance fee. This fee is usually around 6% of the total loan amount according to the credit contract.

Normally, this fee can be added to the principal amount to be paid gradually or deducted directly from the disbursement amount, depending on the agreement between the borrower and the bank.

The loan insurance fee is calculated as follows: Insurance fee = Insurance level x Total loan amount

For example: If you borrow 200 million VND from the bank and the insurance fee is 6%, the insurance amount you need to pay will be: 200,000,000 VND x 6% = 12,000,000 VND.

9. Notes when buying loan insurance

When deciding to purchase loan insurance, borrowers need to pay attention to some important factors to ensure their rights and peace of mind throughout the loan process.

• Choose the right product: Before choosing loan insurance, borrowers should clearly identify their needs and financial capabilities. Insurance products have differences in benefits and fees, so learn carefully to choose the insurance package that suits your circumstances and needs.
• Read the contract carefully: Before signing an insurance contract, borrowers need to review and understand all the terms and conditions in the contract to ensure that their rights are maximally protected.
• Choose a reputable insurance company: Borrowers should choose a reputable insurance company with a transparent history of operations in the market to ensure that debt payments are made quickly and accurately when an incident occurs.

10. How long is the loan insurance period?

The loan insurance term is the period of time during which the insurance contract is in effect, starting from the date the contract is signed until the loan is fully repaid. During this period, if the borrower encounters insured risks (such as death, accidents causing permanent disability), the insurance company will perform the obligation to pay the borrower the outstanding balance to the bank according to the terms agreed in the insurance contract.

The insurance period is usually determined based on the loan term. The insurance contract will be in effect until the loan is fully paid or until the end of the loan term if the loan is paid off early. However, in some cases, the borrower can extend the insurance contract or switch to another type of insurance when needed.

11. Is the loan insurance refundable?

Many borrowers wonder if they can get their insurance premiums refunded if they repay their loans early or no longer need insurance. In fact, this loan insurance premium is not refundable after the insurance contract has been activated.

In another case, if an insured event occurs (such as death or disability) but exceeds the age limit in the contract, the insurance will also terminate and no premiums will be refunded. Loan insurance is mainly intended to protect the bank in case the borrower cannot repay the debt due to unforeseen risks. Therefore, if this event does not occur, the insurance premium will not be refunded.

However, in some special cases, if the insurance contract is terminated before the expected time, the borrower or the insurance company may be refunded a portion of the premium:

If the insurance company terminates the contract: The borrower may receive a portion of the insurance premium back, which may be 100% or according to the percentage specified in the signed contract.
If the borrower requests to terminate the contract: The insurance company will refund a portion of the insurance premium calculated according to the remaining time of the contract.

In short, loan insurance is an important financial solution that helps protect both borrowers and banks from unwanted risks. Hopefully, the above article has helped you understand the benefits and conditions of loan insurance, thereby making appropriate decisions to ensure peace of mind in the process of borrowing capital and using financial services.