Bought a house with Home Loan? Great move! Now lets see how to cover your loan with Home Loan Insurance by Indian insurers.
In my Previous Post I have written how cheap and easy Home Loans have become nowadays. Just 20 years back, buying or constructing a house was a commitment people undertook mostly after retirement. Home Loans enabled middle-class families to shift from rented to owned accommodation. Now cheap Home Loans, high expendable income and emergence of Apartment Culture is enabling young and even single executives to buy their own accommodation. But what about loan default due to death, disablement or job loss? It is better to think when there is time.
Why Home Loan Insurance?
Home Loan is huge commitment and maybe the largest investment for anyone, be it a young professional at the beginning of career or a senior executive with years of experience. We take loan because the requirement exceeds our savings and we have a stable income to pay off the loan EMI. But the scenario can change any moment. An accident, if not fatal, may leave one bed ridden and unable to work. A major disease may ruin our regular activities or a stroke may push one to paralysis. In any case the regular income to pay off the loan EMI is jeopardized. In addition to the mental agony, hospital bills and changed lifestyle, the dependents or survivors are left with a huge Home Loan liability to deal with. That is why it is always prudent to buy Home Loan Insurance along with Home Loan.
What is Home Loan Insurance?
Home Loans are generally long term commitment, typically between 15-30 yrs. One time insurance cover for such long term period can only be provided by Life Insurance Cos. The typical Home Loan Insurance is a term insurance plan with personal accident rider and maybe critical illness rider. Non-Life Insurers also provide Loan Insurance for shorter period (max 5 yrs) and renewable thereafter, covering mainly death or disability due to accident and critical illness.
Who offers Home Loan Insurance?
Unfortunately, as on July 2018 out of the 24 Life Insurance Companies in Indian market, only *Bajaj Allianz [iSecure Loan] offers Home Loan Insurance to retail customers. Their product iSecure Loan is a joint life Term Insurance policy insuring the loan amount for the entire loan period, with premium paying term of 2/3rd the loan period.
Home Loan Insurance for Group customers is offered by *9 other companies (i.e., ICICI Prudential, Exide Life Insurance, IDBI Federal Life Insurance, PNB Metlife, SBI Life, Future Generali, Bharti AXA, Star Union Daichi and Tata AIA). What does Group Policy means? That means, you cannot opt for the insurance unless your loan provider opts for the Group Home Loan Insurance for its borrowers. It also means that, you will have to opt for Home Loan Insurance at the time of availing the Home Loan. To protect their books, every Home Loan provider will be covered under Group Home Loan Insurance or Group Term Insurance. But remember, it is not mandatory to take Home Loan Insurance from Home Loan provider.
* As per independent research done on materials available online at IRDAI website (https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=insprdts&mid=27.1.1), and individual websites of Life Insurers
Pros and Cons of Home Loan Insurance from Home Loan provider
Like any other insurance, Home Loan Insurance has a specific purpose and has its own advantages and disadvantages.
- Home Loan Insurance from Home Loan providers is generally a single premium policy and the premium amount is added to the loan amount. Thus the premium pinch is not felt by the borrower. Otherwise, monthly payment option is also present in which case the premium will add up to the loan EMI.
- In case of joint loan, life of all the borrowers will be covered under same policy.
- Being term life insurance, such policies generally cover all type of death. Most companies also offer Personal Accident rider and few even provide Critical Illness rider. So it becomesOne Single Package Product.
- In case of death or disability, the Insurance Company directly settles the loan amount with the Home Loan provider. Any excess amount is paid to the nominee.
- Normally no pre-policy medical tests are required.
- Income Tax benefit is available under Section 80C,provided the premium amount is less than 10% of the amount of insurance.
- Since the one time premium is added to the Home Loan, you end up paying interest on the insurance premium as well.
- In case of regular premium payment option, the premium paying term is generally less than the loan term (e.g., 2/3rdof loan term). This is because, people tend to pay off Home Loan earlier.
- In case of single premium payment option, if the Home Loan is pre-closed the premium for the balance period already paid may not be refunded.Surrender Value clause has to be examined before opting. In case of monthly premium payment option, this issue does not exist.
- The amount of insurance matches the Loan Principle outstanding. So the amount payable decreases with time.
- Home Loan Insurance is linked to the Home Loan provider and may not be allowed to port in case of transfer of Home Loan.Transferred loan provider may have insurance with some other company.
- Multiple comparisons and research shows Home Loan Insurance is costlier than plain Term Insurance.
Please Note That, Home Loan Insurance is different from Home Insurance. Home Insurance covers the property against risks like fire, earthquake, burglary etc. and may be mandatory for some Home Loan. But Home Loan Insurance covers the risk of default in repayment of home loan and is not mandatory.
Read widely and choose wisely.
Disclaimer: The above article is, without prejudice, based on independent research and materials available online on bank and insurance websites as well as various personal finance websites/forums and personal insurance understanding and judgment, for the sole purpose of increasing insurance related awareness and better decision making.
Link to other blogs in the series:
- Decoding Insurance
- Health Insurance – Decoding Insurance
- Critical Illness Insurance – Decoding Insurance
- Top Up Health Insurance – Decoding Insurance
- Personal Accident Insurance – Decoding Insurance
- Loan Insurance – Decoding Insurance