What Is Home Loan Insurance: Benefits & Loopholes
Home loan borrowers are often misguided by their lenders and are talked into buying home loan insurance product. Some of the finance companies term these products as mandatory and force buyers to pay extra for the premium. However, this is not true. Buying home loan insurance offers extra security but it is not compulsory.
Anita Shah, 32, approached various banks to get the best deal on home loan interest rates and other processing fee charges. After much hard work, she finalised the bank. While completing the formalities, the bank official told her that it was compulsory to purchase the home loan insurance to avail of the loan. On checking with other banks, Shah found out it was not mandatory to buy an insurance policy to avail of a loan. She quickly switched to another bank for the loan.
What is home loan insurance?
Home loan insurance is a plan that covers a borrower's outstanding loan liability to hedge the risk of loss in case he/she dies during the loan re-payment term. These policies offer a cover that reduces every year, as the loan amount comes down. In the event of the death of the borrower during the tenure, the insurance company will settle the outstanding loan with the bank. A home loan insurance policy could lapse upon full repayment of the loan, or after the demise of the borrower, or on transfer of loan to another bank.
However, an applicant needs to know that it is not mandatory to purchase home loan protection plans to avail of a home loan. You must also know that:
- What is protected under the home loan insurance plan is the home loan, not the home.
- Like any insurance policy, a premium will have to be paid on the insurance, too.
- The insurance premium broadly depends on four conditions:
Age: The older you are, the higher the premium.
Amount: The larger the loan amount, the higher the premium.
Tenure: The longer the repayment period, the higher the premium.
Medical record: The better the health, the lower the premium.
- The applicant can either pay the premium himself or get it funded by the lender. For instance, if a person takes a loan of Rs 30 lakh and the premium for the 10-year cover is Rs 50,000, the loan will then become Rs 30.50 lakh (that is, if the applicant gets the insurance funded by the lender).
- Buying a home loan insurance will have a tax implication. If the premium has been paid by the borrower himself, he can claim the tax deduction under Section 80 C of the Income Tax Act. However, if it has been paid by the lender, and is part of the loan that will be paid through equated monthly instalments (EMIs), it will not be possible to claim deductions.
- Typically, home loan insurance policies have a single premium option, instead of regular annual payments. A single premium option means that if a borrower decides to prepay the loan amount, it will not impact his insurance cover or the premium. There could also be portability issues if a borrower wishes to get the home loan re-financed by another lender.
- Also, if the applicant decides to increase the loan tenure due to any raise in the home loan interest rates, his insurance premium may not be able to fully cover his loan. This is so because the principal outstanding will reduce at a slower pace due to the extension of the tenure.
- In case of foreclosure of the loan, the applicant may lose the entire or part of the premium.
- Under the home loan protection plan (HLPP), the insurance offered under the policy progressively reduces as the loan gets repaid. If something happens to the applicant, the insurance company will pay the outstanding loan amount to the lender.
- In case of a term-insurance plan, the insurance company will pay the entire sum assured to the applicant's family, who will then settle the loan with the lender.
- An applicant must choose HLPP only if he finds it difficult to pay the term-insurance premium (that is, the lump sum premium amount) due to inadequate cash flows.
What is the eligibility-
Home loan insurance eligibility varies according to service providers. The minimum age is 18 years while the maximum age of the borrower while availing the home loan insurance is usually 50-60 years.
Claim process for home loan insurance
The insurance plan is taken in name of the borrower of the home loan. In event of death of the borrower, the family members need to file and obtain the claim amount. Once passed, the amount is directly paid to the lender or to the family member beneficiary. In case of all term insurance policies, if the borrower is alive beyond the term of the policy, he does not get back the premium paid.
Why do you need home insurance: Benefits
- In case of the demise of the borrower, the insurance company settles the loan amount with the lender. The excess amount is paid to the beneficiary.
- One can avail of tax benefits under Section 80 C.
- One can opt for other riders in the home loan insurance policy, such as critical illness, disability or loss of job, where the loan amount will be covered not just in case of death but during the occurrence of the mentioned mishaps. These covers come at extra cost.
How to choose the right insurance policy
It is not compulsory to take a home loan insurance policy from the lender company or with the ones, they have tied up with. You can avail the policy along with the home loan or at a later date. You can research the market and take quotes from the service providers.
The bitter truth
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 a matter of procedure.