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Should you insure your home loan?

Buying a home is one of the most important financial planning decisions that you will make during your lifetime. Most Indians buy homes by taking a home loan from one of the lenders. However, this increases the your risk profile as you now owe money to the lender. In order to mitigate this risk, it is strongly advised to get a home loan protection plan.

Why do I need a home loan insurance?

By taking a home loan in India, you have created a liability for yourself. In case something happens to you, the loan will still have to be paid back through your regular EMI payments. If no surviving member of your family can continue to repay the housing loan, the lender can take away your home.

Therefore, if you want to protect your family against the eventuality of having your home re-possessed due to inability to pay your EMI, you must get insurance on your home loan.

What is a home loan protection plan?

A home loan protection plan is one whereby in the event of your death or disability resulting in loss of income, a sum of money will be made available towards the repayment of your loan. This ensures that your family or dependants do not have to worry about the loan repayment and your home will not be taken away.

Lets take a quick example. Assume that you’ve taken a home loan for Rs.10 lakhs. In the next two years you’ve paid back Rs 2 lakhs of the loan amount and Rs.8 lakhs are yet to be paid. However, at this point you meet with an accident. No one else in your family is employed and therefore there is no income to make the home loan EMI payments due to the lender. In this case, if you have a home loan insurance, the insurer will repay the remaining amount of 8 lakhs on your behalf. However if you do not have home loan insurance you run the risk of your home being repossessed by the lender. Your loved ones could be left without the shelter of their family home.

How does it work?

The home loan insurance policy is like a term life insurance policy, except that the life cover will be equivalent to the outstanding home loan amount as per your loan repayment schedule. Your insurance cover keeps reducing as you pay the EMI’s which reduce your outstanding loan amount. Some times the coverage might not be on a reducing balance, but on a flat basis where there is a fixed amount paid out to the beneficiary irrespective of the then outstanding loan amount.

How much does it cost?

The pricing depends on the age of the borrower, the amount of home loan and the tenure of home loan. The rates are lower than individual life insurance policies. You can opt for payment of premium on a monthly basis or a one time upfront payment. Some banks may build in the premium with the EMI of the loan.

What are the eligibility criteria for these plans?

Generally, the minimum age to get this policy is 18 years and the maximum age at entry is 50 years. These policies are available both for joint and individual home loans. These policies sometimes require medical examination. Check with your lender.

How are claims settled?

The policy is always taken in the name of the borrower of the home loan. In case of an eventuality, the proceeds of the insurance are paid to either the lender directly, or to the family member beneficiary. In case the borrower pays the entire loan back, the policy comes to an end with the close of the loan tenure. The borrower will not get back the premium paid if he lives beyond the loan repayment term.

Are there any exclusions?

Yes. The insurer is not liable to pay any benefit in the case of death by suicide, within a year of the date of commencement of policy or issue of policy, if later.

Is it mandatory to have a home loan insurance plan?

It is not mandatory, but is highly recommended. If you don't want to put your family through any additional distress, its best to buy a home loan protection plan. It is also advised that the borrower should compare home loan offers from various lenders and try to find the best home loan, which reduces the repayment liability. This will also reduce the cost of a home loan insurance.

Things to remember

• If you have taken a home loan, you have increased your risk exposure. To offset this, you should take a home loan protection plan.
• The insurance premium can either be rolled into your EMI or you can get a specific policy.
• In case of an eventuality, the proceeds of the insurance can be paid either to your lender directly or to your family.
• A home loan protection plan will ensure that your family still has a home, even though you might not be around.
• Otherwise, your home might be repossessed if no surviving member of your family can continue with EMI payments.

Comments

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s.santhanam said : 22/03/2013	I feel the home loan insurance is an additional burden for the family.this is another way of revenue collections from the public.when they take emi the property is with the bank only as security. where is the question of family liability .the banking policy should not make it mandatory .it is illegal way of collecting money.it should be made optional.
sethu said : 01/09/2012	Really it an informative article which helps to know more about Home Loan Insuaranse. Thanks...
Aruna said : 10/05/2012	Very nice article that gives a fair idea on Home loan insurance. Thanks for posting...
ram said : 20/10/2011	Check for chennaihomeloantrust in facebook This Pilot Virtual trust formed behalf BPO
Palani said : 03/05/2011	hi,I am 40yr old and i am planning to take a home loan of 15lakhs for 18 yrs from IOB bank. I want to take home loan insurance. Which company I ve to take?, i.And in any case wat will be the premium to be paid for the insurance, considering that my EMI has not yet started.
shainky said : 08/02/2011	hi,I am 23yr old and i have taken a home loan of 18lakhs for 15 yrs from hdfc bank. I want to take home loan insurance. Can I take it from any other company or do I ve to take it from hdfc only.And in any case wat will be the premium to be paid for the insurance, considering that my EMI has not yet started.
Nitin said : 16/12/2010	I think home loan insuance is a beetter option to reduce risk in future.Many banks provides this insurance at the time of santioning of home loan. Some banks also provides the insurance against the home loan offered by other banks.
Siddhartha Kumar said : 28/07/2010	I have taken home loan of Rs.24,00,000/ jointly with my wife (co-applicant) at NOIDA. I want to protect my dependants from loan liability in case some thing goes wrong with myself or with my wife i.e. death or disability. Please suggest good and reliable companies that can cater to my needs.
sanyal said : 08/05/2010	Mr Varun, which company has this job loss and illness cover?
varun said : 22/03/2010	Home loan insurance plans cover not only death cause but if u lose job or suffer any ailment , they take some ownership of EMI.This is not possible on individual term plan.
Puneet said : 20/03/2010	Fantastic idea Nitin. Independent life insurance is definitely a better option.
ankur jain said : 25/01/2010	Then which is best insurance for home loan of 20 years? Can you please tell names of insurance so that we can enquiry it in detail
Nitin Grover said : 11/11/2009	I think Home loan insurance plans are not a great idea as one normally pays back the home loan in 15 years or less. Also a lot of time one sells the property or goes from one lender to another which means that the cover ends. Rather one should go for an independent term policy cover which will last for 20 to 25 year tenure despite the fact that the loan is left or not. Also since cover is taken at an early age the premium stays low.