Confused between paying your insurance premium vs. your loan EMIs? Here is what you should do

By: |
June 19, 2020 9:36 PM

In the course of this time, people are still under cash crunch and finding it hard to keep up with paying their dues, be it loan EMIs or premiums. Although both loan repayments and insurance premiums are extremely important financial commitments, one of them has the upper hand.

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Due to the deadly coronavirus, which leads to almost three months lockdown, most people had to face a huge financial crisis. During the lockdown the government had introduced the 3-month moratorium, bringing in relief for borrowers and policyholders. However, even after the lockdown has been lifted, financially people are far away from getting back to normal.

In the course of this time, people are still under cash crunch and finding it hard to keep up with paying their dues, be it loan EMIs or premiums. People who are now capable of paying only one such due are confused about which one to choose. Although both loan repayments and insurance premiums are extremely important financial commitments in their own ways, one should only choose between the two, if one is going through a cash crunch. Adhil Shetty, CEO, BankBazaar, says “If one were to choose between loan repayments and insurance premiums, one should prioritize insurance premium payments after carefully considering the financial implications of opting for a loan moratorium.”

The Covid-19 crisis has tremendously heightened various uncertainties. Hence, having adequate life and health insurance coverage is one of the few effective ways to safeguard one’s family’s finances against adverse possibilities such as hospitalization or death.

Therefore, insurance plans lapsing would put a policyholder family’s finances at great risk. The Reserve Bank of India (RBI) has recently extended loan moratoriums for three more months ending August 31, 2020.

Get out of additional debt

Shetty of BankBazaar says, “One should note that after taking the moratorium, one will accumulate additional interest which will make it more challenging for one to repay the loan.” For instance, if you have on a loan of Rs 50 lakh and paying an interest rate of 8.50 per cent with a tenure of 20 years, your EMI will be Rs 43,391. Assuming you have deferred your first 5 EMIs through the moratorium (during the lockdown 2020) this will increase your projected interest outgo from Rs 54.13 lakh to Rs 64.82 lakh. Along with that your loan tenure also increase from 240 months to 270 months. Shetty says, “Therefore, to avoid paying more and increasing the tenure, it is in a borrower’s interest to proactively reduce the additional debt he/she has created. The way to do this would be to pre-pay a little more than the amount the borrower had to defer.” Hence, if a borrower had deferred his/her 5 EMIs totaling Rs 2.17 lakh, he/she could simply pre-pay 120 per cent of this amount within 12 months of the last deferred EMI, which would erase the additional debt.

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