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All you need to know about home loan insurance

By Rishabh Chamoli | 2022-10-22

While home loans help fulfil long term dreams of owning a property, home loan insurance offers protection against unforeseen events or emergencies. Banks often suggest home loan insurance while approving a home loan application. But is it mandatory or even beneficial?

With property prices surging through the roof, buying a home has turned into a costly affair. Home loans, thus, have become necessary for most people planning to own their dream home. Generally, home loans are taken for a longer duration. They can run up to 20 to 30 years in some cases. However, a buyers financial plan may get upset in case of any unforeseen emergency, putting him at risk of losing the property financed through a loan. In such a case, the responsibility of the loan might fall on the dependents or other family members. This also poses a hazard to the lender, who stands to lose if the borrower cannot repay the debt. To cover such contingencies, lending institutions recommend borrowers to avail home loan insurance.

Is home loan insurance mandatory?
Many lenders nowadays bundle home loan and insurance plan together to market them to borrowers.

Mehra clarifies that home loan insurance is not mandatory as there is no Reserve Bank of India (RBI) guideline to that effect. It is to be taken solely at the discretion of the borrower. However, the way it is pitched to the borrowers often creates the misconception that buying a loan insurance cover along with the home loan is compulsory. Even the insurance regulator Insurance Regulatory and Development Authority of India (IRDAI), has made no such recommendations for the mandatory purchase of insurance with home loans. But, experts believe one should provide protection for all liabilities and additional cover for future payments.

Advantages of home loan insurance
Home loan insurance makes it easier for the borrowers family to repay the liability in case of his death
You may extend your cover to include illnesses, disabilities, or job loss by paying an additional amount
Holders of home loan insurance policies can avail tax deductions for the premium paid under Section 80C of the Income Tax Act
Home loan insurance provides a security cover for the asset
Even in the case of a joint loan, a single policy covers the entire loan
Things to remember while choosing a home loan insurance policy
If you opt for insurance coverage for your home loan, consider a few critical factors to ensure the product meets your needs. Even if the bank promotes the insurance provider, experts advise due diligence on the borrowers part.

Payment method
The mode of premium payment is one crucial factor to keep in mind while availing a home loan insurance. There are primarily three modes of payment available single premium payment, regular premium payment, and limited payment plan. Borrowers must understand that a single premium payment plan clubs the premium amount with the loan value. This increases your Equated Monthly Instalments (EMI) because the lender pays the complete amount on your behalf and, hence, adds that to your monthly EMI for the home loan.

Coverage
It is important to check what is covered under your home loan insurance plan. Most plans might not provide cover for natural death and suicide, while some may cover critical illnesses, unforeseen professional crises, and disabilities, at an extra cost.

Tax deduction
While the premium paid for home loan insurance is eligible for a tax deduction, experts point out that this will not be available to you if you have opted for the single premium payment plan. As your bank has paid the lump sum and you would only be repaying the bank as a part of your EMI, you will lose out on a major tax benefit.

Types of home loan insurance plans
Lenders or insurance companies might offer different home loan insurance plans. These are

Reducing cover insurance plan With time, both the insurance and the loan amount gets reduced
Level cover insurance plan Insurance coverage remains constant until the completion of the loan term
Hybrid cover insurance plan In this type of insurance, the coverage is in effect during the first year of the loan. It then decreases with the tenure of the loan
Factors affecting premiums of home loan insurance
Premiums for home loan insurance are usually based on factors like

Age
Tenure of the loan
Amount of the loan
Medical history of the policyholder
Term insurance vs home loan insurance
Cassie Kromhou, MD and CEO, Shriram Life Insurance Company, shares, Any individual planning for a life cover needs to have a sufficient sum assured to cover their familys living expenses, current liabilities and provide for future fund requirements like child education, and marriage, among others, in case of their untimely death. Thus, having a term insurance policy becomes critical to cover not only liabilities but also expenses and future aspirations.

Life insurance with a home loan is term insurance that provides a life cover of a sum equal to the outstanding home loan, which decreases yearly. Thus, it only covers the home loan liability and is limited to when the loan is repaid or foreclosed. The insurance with the home loan will not provide security for any other liabilities or future expenses of the family.

However, while deciding whether one needs home loan insurance coverage or term insurance coverage, one should consider the following to make a decision

1) Amount of life cover needed One needs to consider if the existing term insurance has sufficient coverage to cover the home loan liability and provide additional protection.

2) Premium Home loan amounts generally are of high value, and one might need a high sum assured (SA) term insurance to cover the loan amount. In home loan insurance, the sum assured decreases every year, and thus the overall premium is adjusted accordingly and can be priced lower than a term cover where the SA remains constant for the term of the plan. Thus availing a home loan insurance for the home loan liability and an additional smaller term cover for other financial needs might be overall cheaper for the customer.

3) Risks In the case of delay or default of home loan EMIs, there will be a risk of difference in the home loan insurance coverage and the actual home loan. In such cases, the difference in the liability of the home loan insurance coverage transfers to the family members in case of the death of the life assured.

While we plan our life goals, it is unpredictable as to what life has in store for us. Hence, experts advise that home loan insurance can help the family to pay off the mortgages and keep the house in case of any unfortunate event. It is also prudent to compare different plans offered by various insurance companies before finalising your insurance purchase.