When taking out a personal loan from a bank or other financial institution, it is likely that you will be offered personal loan repayment insurance.  For an additional regular payment, the borrower will have peace of mind that their loan will be repaid in the event of illness, accident, unemployment or death.  Although personal loan repayment insurance is not required by lenders, many borrowers take out this insurance to cover their repayments.

To be eligible for a personal loan repayment insurance policy you have to be a Permanent Resident of Australia and engaged in a minimum of 20 hours paid employment per week.

It is important to be aware that personal loan repayment insurance does not provide cover for any illness or injury that existed prior to taking out the loan, or which occurred within six months of the date on which the loan was issued.  Inability to work due to pregnancy or childbirth, and voluntary resignation or redundancy, is also excluded from the insurance coverage.  Other exclusions include suicide, and injury or death due to war.

However, if you are a healthy individual with a regular income, personal loan repayment insurance can offer peace of mind at a relatively low additional cost.  The size of premiums is usually linked to the outstanding balance of the loan, and therefore decline over time.  For example, the Bank of New Zealand currently provides personal loan insurance at a rate of 47 cents for every $100 of the outstanding balance on your loan statement.  Under this scenario, a person with a loan balance of $5000 would pay a monthly premium of $23.50.  Other banks and credit unions provide insurance policies that are specifically tailored to their client’s individual preferences and needs.  For example, you might purchase a policy which only covers death, or which includes coverage for disability, trauma and involuntary unemployment.

Most lenders allow you to cancel the personal loan insurance policy at any stage during the repayment of the loan.  Notification of this is usually required in writing, and previous payments are usually non-refundable, although cancellation policies vary between lenders.

If you do make a claim on your policy, payments are normally made directly to the creditor, not to the insured person.

It is important to be aware of any limits or exclusions associated with your insurance policy.  For example, most policies cover involuntary unemployment up to a maximum of 90 days, and most death benefits have a limit on the size of pay-outs.  It is crucial to read the small print on your policy and to ensure that you make additional arrangements, if necessary, to provide financial peace of mind for yourself and your dependents.