It’s not that banks require students to have insurance policies, but they do prefer students who have a life insurance policy equivalent, if not more, than the loan amount.

This is because the life insurance policy of the student acts as a security feature and forms a part of the collateral. In case of the untimely demise of the borrower, the bank recovers the outstanding loan amount from the student’s life insurance policy and the remaining amount, if any, is paid out to the beneficiary of the policy.