Most banks offer their customers a home loan insurance when they fund their homes through a bank loan. Home loan insurance, also know as Home Loan Protection Plan (HLPP), is an insurance plan that covers the balance principal payment against the insured loan in the event of untimely demise of the borrower.
Buying a term insurance life cover to insure your home loan is generally cheaper and offers better risk protection than home loan insurance. Read on to know why.
These home loan insurance policies generally offer an insurance cover that reduces every year as the loan principal amount comes down on regular payments of installments. Most home loan finance companies offer such policies through tie-ups with insurance companies. You can also buy a home loan insurance independently. When you take a home loan insurance through your lender, the premium is charged along with the loan installments.
Though home loan borrowers cannot be forced to take such insurance cover, most banks offer you such cover as an optional add-on when taking a loan. Banks generally act as a third-party agent for insurance companies when offering such home loan insurance to its borrowers. The borrower is generally charge a one-time premium for the insurance cover. However, the premium can also be charged in installments over a period of time.
In case of joint home loans with multiple borrowers, the home loan insurance premium increases accordingly. In the event of the death of any of the joint applicants, the insurer covers the loss.
As banks act as an agent for the insurance company for home loan covers, they earn a commission for each insurance policy.
Key Benefits of Home Loan Insurance
- Comprehensive insurance plan for individual, home and its contents
- Single premium or multiple-premium long-term insurance plan
- Life insurance cover for the entire period of the home loan
- In case of permanent or total disability of the insured, some insurers offer monthly payments for a certain tenure
- Multiple co-applicants can be covered under the same home loan insurance
- Premium paid for the Critical Illness cover part of the home loan insurance eligible for tax benefits under Section 80D of the Income Tax Act
Should You Take Home Loan Insurance?
Quick answer — yes. Life is uncertain and a home loan insurance does help save your family from undue financial burden in case of untimely death of the borrower. In case of death of the borrower, the loan insurance payment covers the entire balance loan amount ensuring your family gets to retain the house even if there is no other source of income.
You do not need a loan insurance if your life insurance cover is big enough to take care of the pending home loan and also provide for your family’s expense after you are gone. An alternative to home loan insurance is to increase your life cover when you take a home loan. This is important for proper financial planning to keep increasing your insurance cover as and when your financial liabilities increase. A home loan is an additional financial liability which requires supplementing your insurance cover.
Why Not to Buy Home Loan Cover?
Generally, home loan insurance plans cover the risk only in certain conditions. Some of the insurance policies will not cover natural death, which means you lose the benefit of the insurance. Read the home loan insurance policy documents carefully to see if the common limitations of such insurance policies are there. If yes, it’s better to look for an alternative insurance policy.
- Loan insurance cover generally depletes with the reducing loan principal amount.
- Natural death (which also covers death due to illness) and suicide might not be covered by the policy.
- Home loan insurance premium might be costlier than a regular term life insurance policy for the same duration and amount.
- Insurance cover is only effective till the loan account is active. If you pre-pay your loan or the loan is foreclosed due to default, the insurance cover ceases to exist.
- Home loan insurance becomes void if you switch your loan to another bank/financier.
Better Alternative: Term Life Insurance Plan
Don’t go for a home loan insurance if you need an exhaustive cover. Instead, buy a term life insurance policy for the loan amount for the entire tenure of your home loan. As term life insurance cover offers better risk cover, including natural death and suicide (after 1 year).
- Term insurance is generally cheaper than home loan insurance plans.
- It also covers untimely death due to natural reasons, sickness and even suicide after one year of the insurance policy issue.
- Insurance cover remains intact even when you switch your loan to another bank or pre-pay your loan.
- Insured amount does not reduce over time.
How to Buy Home Loan Insurance?
Most banks push loan insurance policies with their home loans as it brings additional revenue for them through commissions earned. So, you might not require any additional effort for this safety cover.
When taking a loan, you can apply for an insurance cover through the lender or directly an insurance company, depending on your choice. Insurers generally offer home loan insurance for individuals up to the age of 60-65 years. The home loan insurance premium will depend on your age and health, the loan amount and the tenure of loan.
Insurers might require a medical check-up. Some insurers do not mandate for any medical check-up up to a certain age limit and/or the amount of insurance cover.