Want insurance cover on your loan? IRDAI proposes new rules for lenders bundling the two; details here

Taking a loan with insurance cover could soon come with clearer choices for borrowers, with the Insurance Regulatory and Development Authority of India (IRDAI) proposing new safeguards for such bundled offerings.

The proposals, laid down in a consultancy paper released on Wednesday, are part of a sweeping overhaul of insurance distribution that could put pressure on insurers and distributors to reduce distribution costs and commissions.

This insurance helps cover loan repayments if the borrower is unable to make payments due to certain circumstances. These events typically include death, disability, or involuntary unemployment.

Loan protection insurance provides assurance by alleviating the risk of default and ensuring that the borrower's creditworthiness remains intact.

The premium increases the total cost of the loan. Therefore, borrowers must examine the additional cost before considering such a cover to determine if they can accommodate it within their budget.

The decision to take out a new loan, purchase an insurance cover on it, and determine how to repay it should not be made in haste. Before making such a decision, a sensible borrower should review various loan offers, compare interest rates, features, and terms. Under the proposed rules, IRDAI seeks to bring this exact clarity to the decision-making process.

The consultation paper proposes allowing insurance-linked loan packages where there is a specific and demonstrable benefit to the customer.

For example, a lender may offer a lower interest rate if the borrower provides additional security in the form of term life insurance equal to the loan amount or property insurance equal to the loan amount provided for a property.

However, such conditional package should have following safeguards to enable the borrower to take an informed decision and provide consent, according to the insurance regulator. Check the proposed rules below:

This distinction would give borrowers a clearer picture of insurance costs, rather than having the premium folded into the loan amount and its overall cost.

The insurance regulator also noted that packaging health benefit cover with home or motor loans against critical illness should be discouraged, as that is likely to be cost-inefficient for borrowers.

"Packaging health benefit cover with home or motor loans against risk of critical illness is to be discouraged as that is likely to be cost-inefficient for borrowers," per the consulting paper issued by IRDAI.

The regulator also aims to enhance transparency for customers, giving them an upper hand while making product choices and control when making decisions.

These are proposals under consultation, not final rules. IRDAI has invited comments and suggestions from stakeholders before finalising the framework.