Even as third wave of the Covid-19 infection is in the ‘offing’, the ongoing deadly second wave has already proved catastrophic for families in many ways. Its economic fallout on household budgets has been disastrous as they witnessed loss of income owing to job losses and cut in salaries. This has impacted their future financial commitments such as loan installments etc. Amid this Covid-induced woeful situation, sudden loss of a family member, that too when he or she is a breadwinner for the family, to Covid infection has been most distressful event for innumerable number of families across India. Those families stand miserably shattered who have lost their family members leaving behind financial liabilities in terms of bank loans, which now the legal heirs of the deceased have to repay.
In normal times, securing a safe and prosperous future in the given socio-economic environment has always been a challenging job. For this, one needs a huge cushion of financial resources as the cost of securing the future in terms of pursuing education of their kids, having a home or a car and other necessities of this modern era, is an expensive affair. Here, it’s a bank loan which has remained (continues to remain) as the most trusted option for people, especially youth to fulfill their needs including some big ticket items.
Now, Covid crisis, which is still unfolding, has derailed the organized socio-economic set-up across societies and communities. Apart from risk of losing a life, the crisis has eroded financial capabilities of individuals and families to withstand their financial commitments (liabilities). It turns out a distressful situation for a family if their head saddled with liability of a bank loan is either consumed by a disease, long-term illness or faces a sudden death. If he is a lone bread earner, an unfortunate death that has been happening in the deadly second Covid wave can result in serious financial problems for his family.
Precisely, the ongoing Covid driven situation is grim. Many families/ legal heirs of borrowers who unfortunately succumbed to the infection are in a dilemma. They are unsure what happens to the deceased’s outstanding loan amount. One thing is clear that the banks will have to recover their dues in absence of the borrower and no law can stop them to recover the loan amount from the legal heirs.
Notably, opening up of formal financial channels, especially in personal loan segment, to a common man has transformed (and is still under transformation) living standard to a large extent. If you have a regular and assured income, you can realize your dream of owning a house, a car, a wide range of consumer gadgets and sending your children for higher studies anywhere in the world. The banks are ready to finance your needs and even luxuries. Precisely, people today feel contended to have financial liability in the shape of multiple bank loans as a companion. But at the same time people usually ignore certain risks associated with the contentment they achieve through these loans.
For example, you have taken a home loan. You have sufficient income to bear the Equated Monthly Installment (EMI). But God forbid, if you are no more there during the course of repayment of the loan, the burden of these payments will fall on your family. How your family can pay off the loan when there is no sufficient income? If the loan is not paid out, they will suffer lawsuits and other inconveniences.
How you as a borrower can plan financial protection for family?
When you think about getting a loan, it is important to look at the situation, both from the bank’s perspective and your present and future financial strength. To the bank, loans are a major source of revenue as they charge interest on the money given to you as a loan. So, these loans, for whatever purpose, are not given in charity by the banks. It’s an asset for the banks and, remember, a liability for you. If you as a borrower fail to repay the loan in the given period of time, it can turn into a major financial liability as well as reputational risk for you.
Today, there is an entire generation that is walking into the easy loan market. There are many first time employees or those who are engaged in self-employment ventures who see this access to easy money as economic freedom to spend. They have the hope and confidence that they will earn more in the future to repay their debt. Then there are many, especially those from the old school of thought, who feel that this ‘mindless spending is a recipe for a debt disaster in the making’.
However, banking upon a loan as one of the financial resources is not a bad idea. But at the same time it is financial planning which can help you to achieve your life time financial goals. You have to strike a balance between your assets and the liabilities. So to achieve your financial prosperity, you need to quantify in money terms what resources you need to meet those goals, and quantify the time period during which you want to achieve these goals.
Who will help to settle your financial commitments such as loans in your absence?
In the circumstances described above, you need all-important shelter, which can guarantee repayment of your balance loan amount without burdening your loved ones. Here the best way to nip the evil of this risk is to transfer it through the medium of insurance.
Remarkably, as a safeguard against these risks, one can take route of a loan protection insurance plan to insure his/her outstanding amount. Under this plan, the loan outstanding against the borrower is adjustable from the proceeds of the claim in the event of the death of the borrower and the whole outstanding amount is paid by the insurance company.
However, before going for loan protection insurance, you need to ask certain questions. What does the loan insurance cover? Does it cover death by accident or death by any cause? Does it cover temporary disability only or does it cover permanent disability as well? Check whether you can pay the premium as part of the EMI or does it have to be made as a lump sum amount. Check whether a medical checkup is necessary in all cases.
Then there’s health insurance plan providing cover against the medical care costs. It is an insurance against loss due to ill health or hospitalizations. It safe guards your savings getting washed out in case of any unplanned illness, surgery or hospitalization and getting prepared for unexpected expenses. Precisely, it covers all or part of the medical costs of treating the disease or injury including doctor’s consultation charges, medicine and nursing costs. Treatment can be sought in any recognized nursing home or hospital across India.
What is to be done in case of a home loan with one of the co-borrowers succumbing to the Covid-19 infection or any other disease?
In this situation, the co-borrower who is alive will need to continue repaying the loan. It’s important for him/her to inform the bank of the death of the other co-borrower. The bank will remove the deceased from the loan and will delink the account of the deceased in case repayment was linked to that account. The liability will entirely shift to the co-borrower who is alive and repayment of the loan amount will be linked to his/her bank account.
However, if the borrower had purchased a group life insurance policy from the bank, the co-borrower who is live can approach the insurance company for a claim. The bank will reduce the loan depending on the insurance payout. The co-borrower has to continue to pay the outstanding loan amount.
Can a person who is not legal heir repay loan installment of a deceased borrower?
Before coming to the exact question, let me explain that the first option for the deceased’s family is to repay the loan, if they can arrange the money. If any of the legal heirs is willing to pay the EMI, the bank has an option to add him/ her as a co-applicant. This is subject to his/her creditworthiness.
If there is a situation where none of the legal heirs is in a position to repay the outstanding loan amount of the deceased borrower, the bank can take action under the Sarfaesi Act to recover its dues.
However, KYC (know your customer) and money laundering regulations don’t permit a bank to allow another person, other than the legal heirs, to pay the EMI on behalf of the deceased borrower.