If you have taken a home loan in India, your banker probably would have asked you to purchase a Home Loan Insurance (also called Home Loan Protection plan) and maybe even have said that the loan cannot be disbursed if you don’t take the insurance. What is this ‘Home Loan Insurance Plan’ and is it really mandatory? Let us understand in this post how the bankers misguide the borrowers and force them to purchase the Home loan Insurance and what to do in case a lender asks you to purchase the same when you reach out to them for a Home Loan, and what are the other better alternatives you have.
What is Home Loan Insurance?
Exactly like the name suggests, Home Loan Insurance is an insurance on your Home Loan. In case of an unfortunate death of the home loan borrower, his/her family is left burdened with a huge debt to repay. In such a case, home loan insurance comes into effect and the lending company recovers its outstanding loan amount from the insurance company.
Kindly note that this is a Home Loan insurance and not Home Insurance, it only covers the outstanding loan amount at the time of the claim, and not the full value of the home.
How is the Home Loan insurance charged?
You can pay the upfront cost for the Home Loan insurance premium while taking a Home Loan. However, this may be a burden on the pockets of most of the borrowers since budgets are already tight when you are buying a flat, and on top of that the extra amount in Premium adds more. So, most of the banks suggest a plan to include the insurance cost in the loan amount itself, and increase the total loan outstanding by the insurance premium amount, hence increasing the EMI.
Since the loan outstanding decreases as you repay the loan (calculation for a home loan is explained in this post), your Home Loan insurance cover also keeps on decreasing. Even if your initial Home loan amount (and hence, the initial cover) is 50L and the insurance is claimed after 10 years (when the outstanding loan amount is much less than 50L), the insurance will cover only the outstanding amount and your family won’t get any extra amount in case of a home loan insurance.
Is Home Loan Insurance Mandatory?
Not at all. Getting a Home Loan Insurance is not mandatory. Some bankers even go to the extent saying that the loan cannot be disbursed without a loan insurance, and the same is mandated by RBI. But remember it is NOT mandatory to get the home loan insurance when you are getting a home loan. You can deny any Home loan insurance offered by your bank.
However, you should definitely have a cover against the Home Loan so that your family members don’t face the burden in case of your unfortunate demise. Instead of a Home loan insurance, you can go for a Term insurance plan, which gives a fixed (pre-defined) amount to your family members in case of your unfortunate demise and the cover also does not decrease like in the case of a Home insurance Policy.
Also, the premium paid in case of a Term insurance policy will be much less compared to a Home loan insurance. When I was buying my first house, I took a Rs 21L loan for a Rs 26L apartment, and it was costing me approximately Rs 500 per month extra in EMI for a 20 year loan insurance. I did a little research and denied the insurance since I already had a term insurance policy of a much higher amount covering me for next 35 years.
Summary
In my opinion, rather than getting a Home Loan insurance policy, one should go for a term insurance which covers you for a constant amount throughout the tenure of your loan (even more, depending on the plan) and costs much less. If you already have a term insurance, I would suggest to top-up the insurance with an amount at least equal to the loan amount so that your financial planning doesn’t get impacted.
If any bank forces you to get a Home loan Insurance when you are applying for a Home loan, you can ask them for a written demand and go to the higher management. If you don’t get a resolution, you can even raise a complaint with the RBI Banking ombudsman for a resolution.
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