Home loan insurance, or any mortgage redemption insurance plan, is inevitably part of a banker’s sales pitch when extending sizable long-term credit, such as a home loan. Home loan EMI has significant bearing on one’s financial plan. In case of any untoward event claiming life of the principal earner in the family, financial plan of the family may go completely out of whack. Let us first clarify, it is not mandatory and compulsory to buy Home Loan Protection Plan while availing Home Loan.
What is Home Loan Insurance?
In simple words, it is an Insurance plan that covers only your outstanding loan liability. In case of death of the borrower, the proceeds of home loan insurance cover help the family repay outstanding loan. Nowadays home loan insurance plans are available with some variations and provide borrowers with added unique features.
Some Insurance plans provide critical illness cover at nominal added premium while others also cover home and its contents. Usually these are single premium plans. Some of the lenders have started mixing home loan insurance and term insurance. In such cases, sum Insured remains constant throughout the policy period (loan O/S amount to come to bank, rest goes to individual).
Why is insurance important when taking a housing loan?
- Taking a housing loan may be convenient but read the fine print – it means that you own as much of the home as you have made principal payments for, the housing or finance company owns the rest.
- Making all the principal payments may take up to 10-15 years or even 20 years.
- Having an Insurance provides you with peace of mind so that your family gets all the financial support in case something unforeseen happens to you. This is where the proceeds of a life insurance policy would help. An insurance may be used to payoff the remaining loan amount and keep the home for your family.
- Some products covers certain amount of EMIs in case of job loss as well.
Should you buy the home insurance from the loan lenders only?
Banks and non-banking financial companies tie up with select insurance providers and bundle home loan products with home loan insurance plans. Banks might try to promote home loan insurance only of companies who they have tied up with. You should know that, since the policy is a third-party product, the bank earns a commission for selling the plan. So, there might be situations when you don’t require home loan insurance and it is still sold as matter of procedure.
In most cases, the bank neither discusses the various insurance options available to you nor looks at what is best suited to your needs. You, as the policyholder, does not even get to choose or understand the policy conditions, what it covers and does not cover. The choice of the insurer and the policy will mostly depend on the insurance company with which the bank has a tie-up.
It is advised to shop around and buy the home loan insurance separately.
The loan insurance cover acts as a surety to the lenders. The loan cover is bundled with the loan amount. The borrower can either pay the initial premium himself or he can get it funded from the lender. The options come with different tax implications. If the borrower pays the premium, he will be eligible for tax deduction under Section 10(10D) and Section 80C. However, if it is paid by the lender and is included in the loan amount, the borrower will not get any claim deduction.
How much insurance do you need?
Insurance needs in this case will depend on your loan amount. However, a few insurance companies do offer insurance policies that cover you for the loan amount only; For example, if your loan amount is declining on an annual basis – then there are insurance policies where your cover amount declines in line with the loan amount.
Reason to avoid Home Loan Insurance
- Home loan protection plans are too costly when compared to pure term insurance.
- Most of the plans cover is valid only for 5 years and need to be renewed every 5 years.
- These plans are a single premium policy. You have to pay upfront and it becomes null & void in case of foreclosure of Loan
- These plan does not cover death under Natural Reasons or Suicide.
- Amount cover is not constant but depleting in nature.
- It becomes null and void if Home Loan is shifted to new lender in most cases.
Alternative to Home Loan Insurance
A vanilla term insurance is a better alternative than a home loan insurance policy. The term plans are cheaper and also provide high cover to the borrower. The loan insurance is of little significance once borrower has prepaid loan. It is the same case when the sum assured declines with the time. It is the reason term plan should be considered over loan insurance.
Banks and other non-banking financing companies might always be keen to sell you a fresh insurance policy but you should analyse whether you really need it. In our view, home loan may not be the right product for a home buyer. One should analyse their requirements carefully and buy any insurance after proper research.
Be a Logical Buyer.