When you apply for a personal loan, it's common for the bank to offer (and sometimes present almost as a requirement) life insurance or payment protection insurance tied to the loan. Understanding whether it's genuinely mandatory and what it actually covers helps you decide with a clear head whether it's worth taking out.
It is not legally required for a personal loan
Unlike home insurance on a mortgage (which is legally mandatory, as explained in another article), no life insurance or payment protection insurance is required by law to grant a personal loan. The bank can offer it, and can even tie it to a better interest rate, but it cannot present it as an unavoidable legal requirement for approving the loan.
What this type of insurance usually covers
It typically covers full or partial cancellation of the outstanding loan in the event of the policyholder's death, and in more comprehensive policies, additional coverage such as permanent disability or, in some cases, involuntary unemployment, which covers the installments for a set period under these circumstances.
How it affects the loan's APR
As explained in the article on the difference between a personal loan and a revolving credit card, and in the one dedicated to calculating the APR, the cost of insurance that is mandatorily tied to the granting of the loan (not simply offered as a voluntary option unrelated to the interest rate) must be factored into the APR calculation, since it forms part of the real cost of the operation rather than an independent, optional expense.
When it may be worth taking out
It can make sense if you value the peace of mind of knowing that, in the event of your death or a disability, your family won't have to face the outstanding loan debt, especially if you already have dependents and don't have separate life insurance that already adequately covers that risk.
When it probably isn't worth it
If you already have separate life insurance with enough coverage to pay off your outstanding debts (including this loan), duplicating that coverage with insurance specifically tied to the loan is usually a redundant, unnecessary expense that simply raises the cost of the operation without adding any real extra protection.
Always compare with and without the tied insurance
Before simply accepting the bank's offer, ask them to show you the APR both with and without the tied insurance, so you can clearly see how much that extra coverage really costs you and decide with full information.
Calculate the total cost of your loan
Our personal loan calculator lets you work out the installment and total cost of your loan, factoring in any additional cost (such as this insurance) so you can compare scenarios with a clear head.