In India, a large portion of the population depends upon home loans to purchase their home. Home loans are long-term loans, which may extend for up to 30 years. Generally, the borrower pays EMI on their home loans for a period effectively equivalent to their lifetime. Thus, it becomes extremely important for them to plan for any unforeseen circumstances. Borrowers will not want the burden of their home loans to fall on their families in the event of his/her untimely death. To safeguard their loved ones from this burden, borrowers should opt for Home Loan Insurance.
Home Loan Insurance
Home Loan Insurance, also known as Home Loan Protection Plan (HLPP) is an insurance policy that covers the borrower against the non-payment of their EMI on home loans in the event of death of the borrower. Borrowers need to pay premiums to the insurance providers as a consideration for risk coverage. The insurance company settles the outstanding loan amount with the bank, NBFC, or the housing finance companies in the event of the borrower’s death and the insurance tenure is usually the same as that of the loan. This insurance type protects your family from repaying the home loan if the person who has taken the loan expires. Home loan Insurances are offered by almost every financial institution but are not mandatory while taking any loan.
Features of Home Loan Insurance
- Premium Payment: The borrowers have the option to either pay a single lumpsum premium or to pay periodic premiums along with Equated Monthly Instalments (EMI). As the amount of a single premium is usually very high, lenders add the premium amount to the loan amount and calculate the EMI on the total amount. For example, if the home loan amounts to Rs. 25 lakhs and the single premium for the insurance is Rs. 2 lakhs, your EMI will be calculated on Rs. 27 lakhs.
- Insurance Policy Tenure: Most of the home loan insurance policies offer coverage for a period equal to the tenure of the home loan.
- Coverage amount: The majority of the insurance plan offer life cover equivalent to the home loan outstanding amount. The insurance cover comes to an end as soon as the home loan is settled.
- Options of Riders or Add-ons: Few insurance providers offer optional rider plans along with home loan insurance to increase the cover benefits of the individual. Some of the rider benefits that can be availed include terminal illness, accidental death, disability, etc. The insurance policy premium becomes more expensive than the regular home loan insurance plans if these optional riders’ benefits are opted for.
- Tax Benefits: The insurance policyholder can avail tax deductions under Section 80C of the Income Tax Act, 1961 on the amount of premium paid for their home loan protection cover. However, this tax benefit is not provided if the individual borrows the premium money too and the amount is included with a loan to calculate the monthly loan repayment EMI.
- Joint Loan: Even under a joint home loan, a single home loan insurance covers all the borrowers.
Types of Home Loan Insurance
- Term Insurance: Term Insurance plan is an inclusive policy, which covers all the liabilities and debts of the insurance policyholder, including their home loan. The coverage amount of such insurance policies remains common for all assets insured. In the event of death of the policyholder, the nominee receives the sum assured and they must make the repayments to the lenders to settle the loans.
- Separate Home Insurance: This type of insurance plan covers only the home loan repayment of the individual. In this policy, the coverage size depends upon the outstanding home loan amount. The sum assured under this policy decreases with the outstanding balance of the loan till the point both reach zero. Thus, the sum insured reduces with each EMI repaid. In the event of the death of the policyholder, the insurance provider makes direct payments to the lender to settle the loan.
An individual can purchase home loan insurance either from a general insurance provider or a life insurance company. The insurance policy provided by general insurance providers needs to be renewed on an annual basis and premiums on such insurance policies are significantly lower. While insurance offered by life insurance companies has longer-term coverage but has higher premiums. Thus, borrowers should weigh in on these factors to decide on their insurance policy providers.
Why do you need Home Loan Insurance?
- Protects your Family: In the event of the sudden death of the borrower, the whole burden to repay the home loan falls on his family. This burden on families can be avoided if borrowers opt for home loan insurance. This insurance not only safeguards the individual’s family from loan burden but also the family is not left without a home.
- Safeguards the Assets & Collaterals: In the event of the death of the borrower, if the family fails to repay the home loan, the house and other valuable collaterals are seized by the lenders to cover the outstanding loan amount. The home loan insurance ensures that the home loan is repaid even after the demise of the borrower and hence safeguards the assets and other collateral.
- Tax Benefits: As mentioned above, the premium paid on home loan insurance qualifies for deduction under Section 80C of the IT Act, 1961.
- Simple Premium Payment: The insurance policyholders can choose between single lumpsum premium or periodic premiums. Further, if individuals can’t afford a single premium, the premium amount can be added to the loan amount and deducted through EMIs payments.
- Easy to Purchase: Often individuals are confused between different insurance policies available in the market. But in the case of home loan protection, it is commonly offered along with the home loan. The financial institution that provided you with a home loan also sanctions a range of home loan insurance policies that can be availed by you.
Home Loan Insurance Vs. Home Insurance
Though these terms sound similar to each other, they are completely different and serve dissimilar purposes.
- On one hand, home insurance covers an individual’s home against the risk that includes damage of property due to theft, natural calamities, fire, and the like. This effectively means that home insurance covers the cost of replacement in the event of damage to your home.
- But on the other hand, home loan insurance simply covers the outstanding home loan amount and promises to pay it in the event of the death of the borrower.
Home Loan Insurance is not mandatory by law in India. It is the sole discretion of the borrower to whether purchase home loan insurance or not. Many a time lenders like banks insist that customers opt for insurance to protect their loans. Borrowers usually opt for a single premium HLPP and incorporate the premium in the loan amount. Still, home loan insurance is significant from borrowers’ point of view as well as they will not want to leave their family with the burden of the home loan in case something happens to them. Hence, it is advised to every home loan borrower to consider home loan protection plans.