Borrowers are always concerned that if something unforeseen happens to them in the near future, they will be unable to repay the balance of their house loan. The consumer does not want the burden of obtaining a home loan to fall on their family following their untimely death. Because a home loan is associated with a long-term loan that can last up to 30 years, this concept gets repeated in the borrower’s mind. As a result, it’s prudent for borrowers to keep this in mind and make plans accordingly. On the other hand, purchasing home loan insurance is not required when taking out a loan from a lender such as a bank, a non-bank financial institution, or a housing finance company.
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What is Home Loan Insurance?
Home Loan Insurance, also known as Home Loan Protection Plan (HLPP), is a scheme provided by nearly every single financial institution in which the insurer pays the lender or bank the outstanding or balanced home loan cover insurance amount of the borrower in the event of unforeseen circumstances, such as the borrower’s death. You can use a housing loan insurance calculator to determine your insurance principal needs.
In simple terms, the Home Loan Protection Plan or Home Loan Insurance is an insurance plan. In-home loan insurance in case of death, the insurance company settles the remainder of the home loan with banks, NBFCs, or housing finance firms. The policy term is usually the same as the term of the loan.
Why is Home Loan Insurance Important for Lenders?
Lenders dislike it as it is unprofitable when their loans become bad debts. Lenders require home loan insurance to prevent a home loan from becoming a terrible debt. The lender will lose a significant amount of money if the loan borrower dies, especially if the borrower was the family’s only source of income.
Why is Home Loan Insurance Important for Borrowers?
Insurance to cover a home loan, as we all know, protects the outstanding home loan amount if the borrower defaults on their obligations. A situation like this could emerge due to the loan borrower’s employment insecurity or untimely death. You can choose between a standard base plan with extra features and riders for more extensive coverage. Insurance against home loans is vital for borrowers since it assures that the borrowers’ dependents do not become homeless in their absence or during a crisis.
Read: SBI vs HDFC Home Loan: Comparing Home Loan Options for Your Dream Home
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Ways to Ensure Your Home Loan
Securing a home loan is a significant financial commitment. To ensure that you are protected against any unforeseen circumstances that may affect your ability to repay the loan, consider these two ways to safeguard your home loan.
- You can ensure your home loan by getting home loan insurance. This type of insurance covers your home loan in case of unexpected events such as job loss, disability, or death. With this insurance, your outstanding loan amount will be paid off, relieving your family of the financial burden. It’s important to note that home loan insurance is different from home insurance which only covers the structure and contents of your home.
- Another way to ensure your home loan is by getting term insurance. Term insurance provides a lump sum amount to your family in case of your untimely death during the loan repayment period. This ensures that your family doesn’t have to bear the burden of the home loan repayment in your absence. It’s important to ensure that the sum assured is adequate to cover the outstanding loan amount, so that your family is financially secure.
Types of Home Loan Insurance
Many money lending providers offer 3 main types of home insurance for loan borrowers. The plans are categorised as Reducing Cover Plan, Hybrid Plan and Level plan. The key difference between the three plans is:
- Level Coverage Plan: The insured’s protection coverage remains uniform throughout the loan term.
- Hybrid Coverage Plan: The coverage is complete during the loan’s first year. It begins to decline as the loan balance amount decreases over time.
- Reducing Cover Plan: With the passage of time, both the coverage and the outstanding loan are reduced.
Aspects To Consider Before Opting for a Home Loan Insurance:
Read: Documents Required for a Home Loan
The following are the various options for protecting your house loan:
- Term insurance – Term insurance is obtained to cover all your liabilities and debts.
- Separate home insurance – This insurance policy covers your outstanding home loan if you cannot pay it off.
Reasons to Get Home Loan Insurance
The cost of loan insurance is an important factor to consider when taking out a home loan. The home loan insurance premium is the cost of the insurance policy that is added to the monthly loan repayment.
Nowadays, it is standard practice for the majority of financial institutions to offer home loan insurance in conjunction with the loan. The fact that house loan insurance must be purchased in addition to a home loan is crucial to keep in mind at this point. To avoid worrying about losing your investment and loan repayment in the event of an accident, it is in your best advantage to only buy it. Here are some of the benefits of getting home loan insurance-
- An insurance policy for a home loan protects the investment from unanticipated occurrences like the borrower’s death, an accident, or the loss of their job. Despite the challenging circumstances, it repays the loan.
- In the event of a catastrophe, house loan insurance shields the policyholder’s family from the financial strain of loan payments and investment losses.
- For additional coverage at a cost, add-ons or riders can be added to a house loan insurance policy. The added protection fortifies the policy and protects against conditions such as critical illness, disability, accidental death, and job loss.
- The majority of house loan insurance policies only require one premium payment, making them single premium policies. Due to high premiums, lenders offer the choice of increasing the loan amount to include the premium. In this manner, the premium and EMI are both subtracted.
- All of the borrowers in a joint loan are covered by a single home loan insurance.
- Under section 80 C, home loan insurance offers you tax advantages. Please be aware that you do not receive the tax benefit if you add a premium to your loan amount and pay the premium through EMIs.
Points to Consider while Buying Home Loan Insurance
Coverage: Most home loan insurance plans have diminishing coverage. The coverage size is determined by the amount owed on the mortgage. As a result, when a person repays a loan, the amount insured decreases. For example, home loan cover insurance is a type of insurance that protects the borrower from defaulting on their loan payments. However, in the case of term insurance, the coverage remains the same. In term plans, the principal amount is received by the nominee, who can then make the loan payments to the lender or bank. If you have a house loan insurance plan, the insurer pays the lender immediately for the outstanding home loan to settle the loan.
Read: Plot Loan Tax Benefit: Understand How It Works
Provider: A general insurance company or even a life insurance company might provide you with home loan insurance. Housing loan insurance is designed to cover the outstanding loan amount in case of the borrower’s death or disability. The ones provided by general or public insurance providers must be renewed annually. Life insurance policies are typically for a more extended period.
Terms of loan and insurance: The loan term and the insurance coverage duration must be the same. It is not good to choose a shorter cover duration to extend it later. There’s a reasonable risk you’ll forget to extend your contract in the long term. Furthermore, it gets increasingly harder to obtain adequate coverage as you become older. Even if you do acquire one, it will be somewhat costly.
Note: If you’re thinking about buying a protection plan, make sure it meets all of your needs. Compare several items on the market and choose the one that best meets your needs. Then, sort your costs before bundling your EMI payments with premium payments.
Salient Features of Home Loan Insurance Policy
Home loan insurance comparison can help you find the most cost-effective and comprehensive insurance policy for your home loan.
Home loan insurance comparison can help you find the most cost-effective and comprehensive insurance policy for your home loan.
- The majority of home loan insurance policies have a single premium. Only a few insurers, however, allow you to make annual payments. As a result, the cost of a home loan protection plan is typically included in your house loan and paid in monthly instalments.
- If the insured’s death, the nominee gets a home loan insurance refund payment equal to the outstanding house loan balance, and the policy is cancelled.
- Most home loan insurance plans do not include a maturity benefit because the plan’s main objective is to cover the remaining loan amount in the event of a disaster.
- Every year, the Sum Assured decreases as the remaining home loan decreases.
- In most cases, the Death Benefit is tax-free.
- The period of the home loan protection plan is the same as the term of your mortgage.
- Insurers want applicants to be at least 18 years old when applying, with a maximum age of 50.
Home Loan Insurance Benefits
Insurance to cover home loan is an essential aspect of financial planning when purchasing a property, as it provides a safety net in case of unforeseen circumstances.
- When a borrower dies, and their dependents cannot repay the loan, the lender has the right to terminate the contract on the home and sell it to recoup the debt. However, the lender must pay astronomical foreclosure fees to do so. It helps the lender prevent bad debts if the borrower has current home loan insurance.
- A home loan insurance policy protects one’s family and dependents from debt in the event of a disaster. Since the insurer will cover the outstanding house loan amount, your loved ones will be safe.
- You will be able to choose add-on covers that protect you against permanent disability, catastrophic illnesses, and job loss when you purchase a home loan protection plan. This will safeguard you in the event of an emergency. In addition, if you have these add-ons, your outstanding loan payment will be paid not only in the event of the policyholder’s death but also in the borrower’s disability or severe illness.
- The death benefit you get under the house loan insurance plan is tax-deductible under Section 80C of the Income Tax Act.
What happens When a Home Loan Borrower Passes Away Unexpectedly?
If the loan has a co-borrower named, the liability of repayment of the loan is passed on to the co-borrower. However, if the loan has no co-borrower, repayment is determined by the following-
- Incase of unsecured loans, lenders cannot force legal heirs of the next of kin of the borrower to repay the loan. Since this is an unsecured loan, the lender also cannot seize property belonging to the borrower.
- In case of secured loans, the lender has the ability to confiscate the collateral placed. However, the decision regarding whether or not the asset can be taken in lieu of the repayment needs to be made by the borrower’s surviving legal heir. If the legal heir refuses to repay the loan, only then can the lender reclaim their debt by selling the mortgaged property.
Is Life Insurance Mandatory for Home Loan?
As a borrower, you may wonder if life insurance is necessary when you take out a home loan. The answer is yes. Most lenders require borrowers to have life insurance as part of the home loan agreement. The reason is that the lender wants to ensure that in case of the borrower’s untimely death, the outstanding loan amount can still be paid off.
This helps protect the lender’s investment and prevents the borrower’s family from being burdened with the debt. So, if you are planning to take out a home loan, make sure to check with your lender about their life insurance requirements.
Key Difference between a Home Insurance and a Home Loan Insurance
The distinction between home insurance and home loan insurance is frequently misunderstood. These two terms are entirely different and have very different meanings.
- Home insurance protects your home from a variety of threats, including:
- Theft causes damage to a person’s home or property.
- Natural disasters such as earthquakes, storms, floods, and fires can cause significant damage.
This means that home insurance covers the expense of replacing your home in the event of a disaster. On the other hand, home loan insurance covers the loan you take out to purchase a home. This plan only covers the outstanding loan liability from the time it is brought.
The majority require home insurance from lenders. On the other hand, home loan insurance is not required and is entirely at the discretion of the loan applicant or borrower.
Home Loan Insurance Cover Plans for the Top 3 Banks
To ensure the best home loan protection plan, it is crucial to compare the different options offered by lenders. Here are the highlights of the best home loan insurance policy in India.
A. HDFC Life’s Home Loan Protection Insurance Plan’s Highlights
- It is a Death Benefit Only Decreasing Term Insurance Policy.
- This plan offers a single premium payment option.
- The home loan insurance premium can be rolled into the loan payment and paid in monthly instalments.
- According to the policy’s timetable, the Sum Assured decreases each year.
- This plan does not provide a Maturity Benefit.
- If the Life Insured dies within the Policy Tenure, the equivalent Sum Assured is issued as Death Benefit to pay down the outstanding Home Loan, and the policy is terminated.
B. SBI Life’s Home Loan Protection Insurance Plan’s Highlights
- Coverage for life for home insurance.
- Repayment assistance for a range of loans.
- Co-borrower protection is provided, that is, home loan insurance for joint applicants.
- Gold or Platinum plan options are available.
- Coverage period, premium payment term, and frequency options are all available.
C. ICICI’s Term Insurance for Home Loan Plan’s Highlights
- Life Coverage Has remained the same over the past 20 years
- Up to a 20-year policy, tenure is available.
- You have the option to keep your life insurance even after the loan is paid off.
- Get a Tax Break Based on Current Tax Laws
- It is possible to cover both the applicant and multiple co-applicants.
- There are no medical tests up to 3.5 million dollars.
The best ways to ensure your home loan and insurance
Buying a home is one of the most significant investments for an individual or a family, and it often involves taking a home loan. Securing a home loan can be a complex process, but there are ways to ensure that you get the best deal and that your investment is protected.
- One of the first steps to ensuring your home loan is to conduct thorough research on different lenders and their loan products. The Reserve Bank of India (RBI) provides a list of licensed banks and non-banking financial companies (NBFCs) that offer home loans. This list is regularly updated and can be accessed on the RBI website.
- Another way to ensure your home loan is to maintain a good credit score. Lenders evaluate your creditworthiness based on your credit score, which is a numeric representation of your credit history. A high credit score indicates a good credit history and can increase your chances of getting a favorable loan offer.
- In addition to a good credit score, lenders also consider your debt-to-income ratio. This ratio compares your monthly debt payments to your monthly income and indicates your ability to repay the loan. A lower debt-to-income ratio can increase your chances of getting approved for a loan and may also result in a lower interest rate.
- When selecting a loan product, it is also essential to consider the loan amount, interest rate, loan term, and other associated fees. Comparing different loan products can help you find the best deal that suits your financial situation and goals.
- Finally, it is crucial to read and understand the terms and conditions of the loan agreement before signing it. This includes the repayment schedule, prepayment options, penalties for late payments, and other relevant information.
By following these tips and conducting thorough research, you can ensure that you get the best home loan deal and protect your investment in the long run.
Protecting your home loan: Considerations for Indian homebuyers
While it makes sense to safeguard your family with house loan insurance, you should be aware of the downsides it has in terms of increasing your overall expenditures. Instead, you might choose to pick a simple term plan, which offers you cost-effective insurance coverage for all of your existing liabilities, including your mortgage. When you take out a home loan, you are taking on a financial obligation that will continue for several years, depending on the loan’s term. However, because you can’t predict what might happen over the course of the loan’s more than 20-year term, it’s a good idea to ensure the loan by purchasing home loan insurance.
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Frequently Asked Questions
Q1. Is property insurance mandatory for home loans as per RBI?
Answer – While life insurance is not mandatory for a home loan, it can provide additional protection to your family in case of unforeseen circumstances. It is not essential to obtain a home insurance plan if a borrower takes a home loan from any financial institution, according to regulatory agencies like the RBI and IRDA.
Q2. Is insurance a requirement for a house loan?
Answer – No, home loan insurance is not required, but if you can afford it, it is an added benefit that will protect you from financial ruin. If you have taken out property insurance for a home loan, the bank will not be able to auction your home in the event of an emergency.
Q3. Is there a tax benefit for home insurance?
Answer: Yes, there is a home loan insurance tax benefit. If the borrower pays the premium himself or herself, he or she is qualified for a tax deduction under Sections 80C and 10 of the Internal Revenue Code (10D). The highest tax benefit amount that can be claimed under Section 80C is Rs. 1.5 lakhs.
Q4. What are the benefits of Home Loan Insurance?
Answer – There are two main benefits of purchasing a home loan insurance
Peace of mind: You will have peace of mind knowing that your family will be safe and that your debts will be paid even if you are not present.
Tax advantages– If you choose such a plan, you will be entitled to a tax deduction for premium payments on HLPP under section 80 C of the Income Tax Act (Home Loan Protection Plan). Whether you pay in one lump sum or over the course of your EMI, you will receive this tax benefit.
Q5. How does Home Loan Insurance Work?
Answer: This is a type of insurance that protects you against the risk of defaulting on your loan. The proceeds of this home loan repayment insurance assist the borrower’s family in meeting their repayment obligations in the event of the borrower’s death. As a borrower, you will be charged a premium based on your age, loan amount, and loan term. You have the option of paying it all at once or combining it with your EMI payments.
