Group Credit-Linked Life Insurance

What is Group Credit-Linked Life Insurance?

Group credit life insurance is a specialized life insurance product designed to protect both borrowers and lenders in the context of loans. It provides insurance coverage to a group of individuals—typically borrowers from a financial institution, such as a Banks, NBFCs, or Micro finance organisations ensuring that if a borrower passes away (or, in some plans, suffers from a covered disability or critical illness), the outstanding loan amount is paid off by the insurer.

How it works?

• Group Enrollment: A lender (such as a bank or financial institution) purchases a group credit-linked life insurance policy covering all or a subset of its borrowers.
• Premium Payment: The premium is often paid as a single lump sum and is deducted from the Loan amount or can be included in the borrower’s loan EMI. The cost is typically based on the loan amount, coverage duration, and number of insured members.
• Coverage Activation: Once the policy is active, if a covered event (such as death or disability) occurs, the insurer pays the outstanding loan balance directly to the lender, relieving the borrower’s family from the debt burden.
• No Maturity Benefit: These policies generally do not offer maturity or survival benefits; the benefit is only paid in the event of a claim during the policy term.

Key Features

• Covers Outstanding Loan: The sum assured typically matches the outstanding loan amount, which can be structured as a reducing cover (decreasing with the loan balance) or a level cover (fixed for a period).
• Protects Borrowers’ Families: Prevents the borrower's family from being saddled with debt in case of the borrower's untimely death or disability.
• Protects Lenders: Ensures lenders are repaid even if the borrower cannot fulfill the obligation due to death or disability, reducing the risk of non-performing assets.
• Eligibility: Usually available to borrowers within a specific age range (e.g., 18–60 years), and can cover various types of loans such as home loans, personal loans, car loans, and microfinance loans.
• No Medical Tests: Many group credit life policies do not require medical examinations, making them accessible to a wide range of borrowers8.
• Flexible Premium Payment: Options for single, limited, or regular premium payments, depending on the policy and lender.
• Tax Benefits: Premiums paid may qualify for tax deductions as per prevailing tax laws.

Drawbacks of Group Credit-Linked Life Insurance

This type of life insurance offers a reduced sum assured that only covers the outstanding loan amount. Unlike a fixed sum assured life insurance policy, which can provide the full loan amount or a set sum to your dependents, credit-linked insurance decreases as you repay your loan.

For example: Suppose Mr. X takes a home loan of ₹50 lakhs for a tenure of 10 years, paying an EMI of ₹66,075 per month. After 3 years, his outstanding loan balance would be around ₹39.81 lakhs. The insurance coverage will only be for ₹39.81 lakhs, not the original ₹50 lakhs.

Who should consider this insurance?

• Individuals without a term insurance plan and not planning to buy one soon.
• Those unable to get term insurance due to irregular income, health issues, or other reasons.

Who should avoid this insurance?

• People who already have a term insurance policy.
• Borrowers taking secured loans (against assets like cars or plots). Since the lender holds the asset as collateral, they are protected in case of default or death.

Common Lender Practices to Watch Out For (Not Recommended):

• Processing loans without your informed consent.
• Misleading you into believing credit-linked insurance is mandatory.
• Linking the insurance premium with your loan interest rate.
• Charging a one-time premium upfront by deducting it from your loan amount. For instance, if you take a personal loan of ₹10 lakhs, the lender might deduct ₹15,000 as insurance premium and disburse ₹9.85 lakhs to you.

Comparison with Traditional Life Insurance

Feature	Group Credit-Linked Life Insurance	Traditional Term Life Insurance
Coverage Amount	Linked to outstanding loan amount	Fixed sum assured
Beneficiary	Lender	Individual’s chosen nominee
Premium Payment	Often single premium or included in EMI	Regular premiums
Maturity Benefit	None	None (for term plans)
Medical Underwriting	Usually not required	Often required
Purpose	Loan protection	Income replacement, family protection

Summary

Group Credit-Linked Life Insurance provides coverage only for the outstanding loan balance, which decreases as you repay your loan. Unlike traditional term insurance that offers a fixed sum assured for beneficiaries, this insurance covers only the remaining loan amount at the time of an insured event. It is suitable for individuals without term insurance or those unable to obtain it due to income or health issues. However, it is generally not recommended for those with existing term plans or loans secured by assets, where the lender holds collateral. Borrowers should be cautious of common lender practices such as mandatory inclusion without consent, linking premiums to loan interest rates, or deducting the insurance premium upfront from the loan amount, reducing the disbursed funds.

Pro Tip : 

If you have already taken group credit-linked life insurance or insurance linked to your home loan, personal loan, car loan, or any other loan, and you also have a term insurance plan that provides sufficient coverage (use a term insurance calculator to confirm), it is advisable to surrender the loan insurance and claim the surrender value. If you do not yet have a term plan, you should obtain one first, then surrender the credit-linked loan insurance. This approach helps you get better overall life coverage, as term plans generally offer fixed, comprehensive protection for your loved ones beyond just the outstanding loan amount.

Regards,

Honvest Team.