What is Loan Insurance? 4 Important Things to Know

1. What is loan insurance?

Loan insurance is an insurance contract between the borrower and the insurance company. Accordingly, the insurance company will commit to paying all or part of the remaining loan amount to the bank, if the borrower encounters unfortunate risks such as death, permanent disability, loss of ability to work, etc. Thus, with loan insurance, the bank will minimize financial risks and the borrower will also ensure personal reputation.

Loan insurance will be designed based on the form and purpose of the loan. Currently, there are 3 main types of loan insurance:

• Consumer loan insurance: This type of insurance is designed to protect personal consumer loans, such as loans to buy electronics, loans to buy motorbikes, travel loans, etc. Consumer loan insurance is for loans with not too large value and short term.
• Unsecured loan insurance: This is an insurance package for loans that do not require collateral. When borrowers encounter risks in life, the insurance company will help the borrower repay the bank. 
• Mortgage loan insurance: This type of insurance is designed to protect mortgage loans, secured by assets, usually loans to buy houses or buy land. Mortgage loan insurance is for long-term loans and large loan amounts.

2. Is it mandatory to purchase loan insurance?

According to Circular 39/2016/TT-NHNN regulating lending activities of credit institutions to customers and related legal documents, there is no mandatory provision on purchasing loan insurance. Specifically, Article 15 of Circular 39/2016/TT-NHNN stipulates that “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”.

Thus, the purchase of loan insurance by the customer when borrowing capital is an agreement between the bank and the borrower based on the voluntary nature of the parties, and the borrower is not required to purchase loan insurance when borrowing capital.

3. What are the benefits of loan insurance?

Loan insurance is not mandatory, but participating in this financial solution will bring many benefits to customers and banks. Specifically as follows:

4. Loan Insurance FAQs

Loan insurance is a safe financial solution for both banks and customers. Here are some answers to common questions about loan insurance to help you better understand this financial solution:

Question 1: How much is the loan insurance fee?

Loan insurance fees are usually around 6% of the total loan amount under the contract. However, this is only an estimated figure and can change depending on many factors such as:

• Bank: Each bank has different insurance fees.
• Type of insurance: Death, disability, loss of working capacity insurance, and mortgage insurance will have different fees.
• Insurance term: The longer the insurance term, the higher the insurance fee.
• Borrower's health condition: For people with a medical history, the insurance fee may be higher.

How to calculate loan insurance fee

Loan insurance = Insurance rate x Total loan amount

Payment method: Insurance fee is usually added to the initial loan amount or divided equally into repayment periods.

For example: If you borrow 100 million VND with an insurance rate of 6%, the insurance fee you have to pay is: 100,000,000 x 6% = 6,000,000 VND.

Question 2: In what cases is loan insurance paid?

Loan insurance is usually paid in the following cases:

• Death: When the borrower passes away, the insurance company will pay the insurance amount to the beneficiary.
• Total and permanent loss of working capacity: If the borrower is completely and permanently disabled due to an accident or illness, the insurance company will pay the insurance amount to help the borrower repay the debt.
• Permanent disability: Depending on the level of disability, the insurance company will pay part or all of the insurance amount.
• Damage to mortgaged property: In case the mortgaged property (such as house, land) is seriously damaged by fire or natural disaster, the insurance company will pay part or all of the insurance amount to repair or rebuild.

Each loan insurance contract will have clear payment terms and customers should understand these terms clearly.

Question 3: Is the loan insurance money refundable?

Most loan insurance contracts do not have provisions for refunding insurance premiums to customers. In some special cases, the insurance contract is canceled, the customer can get a partial refund of the insurance premium, however, this depends on the regulations of each insurance company.

Thus, loan insurance is a safe financial solution for both borrowers and banks against unexpected risks in life. Hopefully, this article has helped you answer the question of what loan insurance is and make the right choice to feel more secure when borrowing capital.