How Does A Home Loan Protection Plan Work?
Are you having sleepless nights because your home loan runs into millions or crores?
Do you fear that your family may have to bear the burden of servicing your home loan if something unexpected happens?
Do you worry that the lender may seize your home and force your family to vacate if you die?
Well, if you are thinking along these lines, you are probably worrying too much.
Home loan protection plan (HLPP) will solve many of your problems!
MakaaniQ tells your more about home loan protection plans.
What are home loan protection plans (HLPPs)?
A home loan protection plan (HLPP) covers the outstanding home loan amount with the bank/lender if the borrower dies. If you want a home loan protection plan, there are two options available to you. One option is to pay the premium as a lump-sum amount in one single payment. The other is to include the HLPP Equated Monthly Instalment (EMI) clubbed with the home loan instalment. Remember that a home loan protection plan raises the cost of credit, regardless of which option you choose.
Interest rates do not come into the picture if you pay a lump-sum amount for the premium. But if you take a loan to pay the premium, then the lender pays the premium to the insurance company and collects it from the borrower over the home loan tenure. This means that you will have to pay a higher EMI.
In short, HLPP is a risk-mitigating tool that protects home loan borrowers from the risk of default in the event of death.
The quantum of finance for the HLPP never exceeds the amount of the home loan insurance premium.
Operational guidelines for HLPP EMI
- Loan to value ratio (LTV) for HLPP is based on the primary home loan amount
- Fixed-Obligation-to-Income ratio (FOIR) is calculated based on the sum of the primary home loan amount and the insurance premium amount
- Credit appraisal is done for the HLPP as well
- The sanction letter of the primary home loan is required to evaluate the HLPP
- Collateral is linked to both the home loan and the HLPP
- Home loan insurance policy lapses on full repayment of home loan, after the demise of the borrower, or on transfer of the loan to another bank
- HLPPs are mostly single premium policies
- However, there are variants for regular and limited premium payment terms
- Under regular premium plan, the premium payment term is the same as the policy term
- Under limited premium plan, the premium payment term is less than the policy term
Facts about HLPP
As a home loan buyer, you must know that according to the law, it is not mandatory that you take a HLPP. The decision to purchase HLPP is left to the discretion of the home loan borrower. No lender can force home loan borrowers to buy HLPP.
The need for HLPP vary from case to case. There are certain policies and schemes that require HLPPs, but this must be mentioned in the home loan agreement. The home loan buyer must be aware of this.
Home loans are secured loans. So, lenders are already protected. HLPPs are intended to protect you against risks, more than it is to protect lenders against risks.
If something unfortunate happens, the beneficiary of the policy-holder gets the excess money back (if there is any left) after the insurance company settles the outstanding home loan amount with the lender.
Concerns related to HLPPs
The biggest concern related to HLPPs is that in case of single premium plan policy where the premium amount is clubbed with the home loan amount, there will not be tax benefits under Section 80C. This is because it is assumed that the premium is being paid by the bank/lender and not by you. Under some schemes of HLPPs, however, receipts are provided for premium payment to enable you to claim tax deductions. But the receipt is for the lower amount, and not for the actual premium amount that is paid.
In case of foreclosure, you may lose the whole or part of the premium amount paid.
HLPPs are also considered expensive, as it is a third party product.
Quick Tip: What if the lender insists that you purchase HLPP?
You can send the right message across by telling that you are aware of the fact that HLPPs are not mandatory. Ask the lender for proof to the effect that purchasing insurance is mandatory. You can also look for causes to this effect in the loan agreement, and ask questions if necessary.
The high amount of margin money (i.e. an owner's contribution in loan) can be made to avoid home loan insurance product. Most of the times, HLPP is levied/asked for because of the low margin money.