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What is Credit Insurance and its types, why do you need it? Knowing Benefits, Risks, Documents

What is Credit Insurance?

Credit insurance is a form of insurance policy or business insurance that is purchased by a borrower. Their main motive is to protect the holder from the borrower’s inability to repay the loan or debt in the case of injury, death, unemployment, etc. Credit insurance assures a lender of repayment if a borrower is unable to pay his loan due to death, etc. The insurance company will pay on behalf of the policyholder. However, Credit insurance is most often sold as a credit card option, with a monthly cost.

Why should you consider buying credit insurance?

Protection against risks to your business is important. Credit Insurance is a tool that helps companies to expand their business. It plays a vital role in protecting companies against customer defaults. It covers the sales of the business to their buyers on credit in case the risk of loss due to the insolvency of their customers. Many national and private insurance companies in India come up with credit insurance. This helps the owner to reduce the loss due to customer defaults, improve quality, reduce risks, etc. It also protects the exporter against any loss incurred during export of goods and services.

What Risks are covered in the policy?

Commercial Risks:

  • Insolvency
  • Non-payment by the buyer

Political Risks:

  • Non-payment because of Natural disasters like earthquakes, cyclones, floods, etc.
  • Cancellation of import license
  • War, revolution, riot, etc.
  • Non-payment by the government buyer
  • Any measure was taken by the country where the buyer is located, preventing payment of a transaction.

Types of credit insurance

  1. Various types of credit insurance are –
  2. Credit life insurance
  3. Credit disability insurance
  4. Credit unemployment insurance
  5. Credit property insurance
  6. Trade credit insurance

Credit life insurance

This type of life insurance policy helps pay off loans in the case of the sudden death of the policyholder. Credit disability insurance
This policy is also called Credit accident and health insurance. This type of policy will pay a monthly benefit to a lender directly. You have to be disabled for a certain amount of time to claim the insurance. Credit unemployment insurance
This policy is also called as involuntary loss of income insurance. In this insurance, if a person become unemployed, the insurance pays a monthly benefit directly to the lender equal to a loan’s minimum monthly payment. But you must remain unemployed for a certain number of days to apply for benefits.

Credit property insurance

This insurance protects the personal property by provide a loan if that property is theft, destroy, loss or damage by natural disaster. Trade credit insurance
It provides safety for losses in the case of debt receivables due to the failure of customer repayment


How Does Credit Insurance Work?

Credit insurance can be a lifesaver. Suppose, if you have sold your product or a service and if your huge payment gets stuck than a credit insurance helps in managing such situations by providing the amount that was not paid by the client. This payment is done in a certain percentage and not complete of it, as must be pre-specified in the policy document.

Benefits of buying credit insurance plans

  1. The insurance provides financial protection to organisations whose business deals in selling goods and services on credit to individuals in India as well as abroad.
  2. The insurance policy ensures that businesses get the payment for the goods that they have sold.
  3. Security of cash flow.
  4. Minimise bad debt.

Documents needed for insurance Claim Process.

  • Claim form
  • FIR
  • Books of accounts which show the debtor’s balance
  • ID proof
  • Bank account details of the insurance policyholder
  • Other documents required by the insurance company

Some major Companies that provide credit insurance in India are –

  • ICICI Lombard General Insurance Company Limited
  • HDFC Ergo General Insurance Company Limited
  • Bharti AXA General Insurance Company Limited
  • IFFCO Tokio General Insurance Company Limited
  • The New India Assurance Company Limited
  • United India Insurance Company Limited
  • Export Credit Guarantee Corporation of India (owned by Govt. of India)
  • Bajaj Allianz General Insurance Company Limited
  • SBI General Insurance Company Limited
  • TATA AIG General Insurance Company Limited

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