Servicing long-term credit such as a Home Loan is a big commitment which can extend for a lengthy period of up to 30 years. During the loan tenor, borrowers could face adverse circ*mstances wherein they might find it difficult to pay the EMIs due to financial crises, job issues, health conditions or even death. At such times, the onus of loan repayments normally falls upon the borrower’s family members, who may feel monetarily overwhelmed and unnecessarily burdened to deal with the situation.
Therefore, in order to safeguard against such an event, banks and lending institutions prefer that their borrowers buy a Home Loan insurance policy. This can support the outstanding loan amount without affecting the monetary standing and mental peace of the borrower’sfamily; thus, ridding both the lender and the borrower’s family of countless hassles and other associated challenges.
Home Loan Insurance and Housing Loans
Several lenders include insurance charges into the regular loan costs raising the applicable rate of interest slightly. At the same time, some lenders may exempt you from purchasing insurance cover and instead, cushion the lending risk by tendering a higher Home Loan interest rate. In certain instances, lenders might even insist upon taking insurance and, in fact, push for specific insurance plans. This can create several problems for borrowers arising from a lack of choice, especially if they are not given proper information and alternatives.
It must be noted that the Reserve Bank of India does not mandate the purchase of insurance cover for the purpose of availing a Home Loan. Thus, banks and lending institutions cannot make it obligatory to buy insurance products from their authorised insurers, even though it is considered essential to secure both property and loan insurance when obtaining a house loan.
What is Home Loan Insurance?
Home Loan insurance is an insurance plan that covers a borrower’s outstanding loan liability during unforeseen situations such as disability, death, job loss or any other instance that might hinder loan repayments. Availing this insurance ensures that the borrower’s family members are not burdened with repaying or closing the loan at such times. Instead, the insurance company comes into the picture and settles the balance loan amount with the lender. The policy lapses upon full repayment of the loan or demise of the borrower.
Is Home Loan Insurance Mandatory in India: Overview
It is not mandatory to buy insurance cover while taking a housing loan in India although it proves useful in times of need. Regardless, neither the law nor regulatory bodies such as RBI or IRDAI deem it necessary to purchase Home Loan protection plans provided by banks or finance companies. Obtaining an insurance plan is at the sole discretion of the buyer and one cannot be forced into it. You are free to buy cover from any life insurance company and need not settle for the one approved by your lender.
RBI Guidelines for Home Loan Insurance
The RBI’s August 2021 updated guideline regarding Home Loan insurance clearly states that banks and lenders cannot follow restrictive practices of forcing a customer to opt for products of a specific insurance company or link the sale of such products to any banking product. Further, it mentions that this information must be prominently declared in all publicity material distributed to customers so that they are aware that these purchases are purely voluntary and have no bearing on availing any facility from any bank or lender.
Difference Between Home Loan Insurance and Home/Property Insurance
Home Loan insurance differs from other insurance schemes as they are customised to shield the borrower’s credit portfolio. Home or property insurance, on the other hand, is designed to safeguard the property and its contents against natural disasters, thefts or other events that cause property damage. A home insurance is required for availing housing loans since it guards the lender’s investment in the concerned property, whereas loan insurance, although beneficial, is not deemed obligatory.
Unlike life insurance policies, loan insurance has an assured sum which decreases over time. This means the pay-out reduces as the loan progresses, while the loan principal comes down. It has a fixed term and covers only the loan amount and not the borrower’s life.
Is There a Need for Home Loan Insurance?
Lenders extend housing loans with the intention of receiving regular repayments. In case of a borrower’s inability to pay the instalments, the lender’s credit investment stands at risk. A loan insurance cover provides lenders with the assurance that the pending loan amount will be repaid.
Moreover, house loan insurance is important for borrowers as it serves as security for their family during adverse situations ensuring that they are not held liable for loan repayments or closure.
Single Premium v/s Term Insurance
Housing loan insurance is a low-cost, high coverage plan with no maturity value. Generally, lenders insist upon single premium term insurance plans to manage your liability. They even allow you to add the premium amount to the loan itself so that you do not pay anything upfront and yet get the loan insured. This could subsequently lead to a slight increase in the EMIs that won’t pinch your pocket.
However, you cannot avail of any tax benefits on the premium sum. This insurance may also prove to be a hurdle if you ever opt for a Home Loan balance transfer facility. Conversely, in case you buy a term insurance plan, the premium payments will qualify for tax deductions under Section 80 C.
What should You do if Your Lender Insists upon Insurance?
Lenders may, at times, refuse to give you a loan if you don’t buy the loan insurance through them. In such a situation, borrowers tend to give in because searching for another lender may appear tedious. Experts recommend that individuals should first communicate to the lender that it is not obligatory to obtain Home Loan cover in order to secure a housing loan. If your lender still maintains their stand, request them to issue a written document stating the same.
And if that does not help, speak to higher officials or senior management of the lending institution. You may also raise a complaint with the Banking Ombudsman by following due procedure.
Understanding Home Loan Insurance
When you already hold a term insurance plan, you can top it up with an amount equal to that of the Home Loan principal sum. Ideally, one should have a cover of at least 10 times one’s income. Try not to accommodate the Home Loan liability into the existing term cover as it may compromise your family commitments.
If we take an example: You may seek a Home Loan of Rs. 30 lakh and already possess a term insurance cover of Rs. 80 lakh. You will then require an additional cover for the loan equal to the principal amount of Rs. 30 lakh.
In case you don’t have a term insurance plan, you will have to compute the total amount that your family would need, including the Home Loan liability. You may then proceed with the purchase after you receive the loan sanction. Citing the example above, one may need to get a cover of Rs. 1.1 crore to meet the protection needs of their family and for the loan insurance. This extra cover will remain active till the end of the loan tenor. Once theoutstanding becomes nil or is paid off, you may drop the term plan earmarked for the purpose.
Additional Key Areas to Consider
The coverage and premium of loan insurance policies usually vary depending on the insurer and the terms of the policy. Borrowers should research and compare different policies using an online Home Loan insurance premium calculator to determine which policy caters to their requirements. Many lenders and insurance companies offer access to this financial tool on their official websites free of charge.
If you are trying to take up a Home Loan for purchasing a house, you could be asked to buy insurance along with it. This practice is so commonplace that borrowers rarely question lenders considering it to be the norm. Having adequate insurance cover is a sign of sound risk management and good financial planning. Even so, it is within your rights to take stock of your situation and make informed choices, rather than go with the product pushed to you.
Moreover, to ascertain the exact amount and type of cover required, examine your priorities and financial condition. Thereafter, assess the amount of loan you need and the overall viability. In this regard, make use of a Home Loan EMI calculator to check the payable EMIs. Once you are sure of the insurance you wish to opt for, calculate the costs involved to factor them into your calculations.
One must also keep a few basic points in mind when seeking Home Loan insurance cover:
- The premium for Home Loan insurance is usually a percentage of the loan amount and is paid on a yearly basis
- These policies typically have a maximum coverage limit
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The type of policy you choose is mainly based on your age, occupation, health status and various other factors
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Insurance charges are primarily computed according to the loan amount, tenor, borrower’s age, etc.
Summing Up
Remember to plan your housing loan until the end of the tenor in such a manner that you can support the monthly instalments in addition to your regular expenses, future commitments and emergencies. Furthermore, consider all the related aspects carefully before you select an insurance plan based on your convenience and need.
