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Why do banks require an insurance policy? - 5-Mar-2008
When the loan amount is greater than a lakh, banks usually prefer students to have Life Insurance Corporation (LIC) policies equivalent to, or more than, the loan amount. This is nothing more than a security feature that also forms a part of your collateral. In case the student is not able to pay back the loan, the bank does not lose money on it and can recover the outstanding amount from the student's LIC policy.
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