If you’re taking a home loan, chances are you’ve also been asked whether you want to add home loan insurance. It may sound like an extra expense, but it can act as a crucial financial safety net.
However, whether home loan insurance is worth buying depends on factors such as your existing life insurance cover, financial liabilities, dependants, and overall repayment capacity.
Before saying yes or no to your lender, it’s important to understand who stands to benefit most, who may already have adequate protection, and the key factors to consider.
What is home loan insurance?
Home loan insurance is a protection plan linked to your home loan. If something unfortunate happens to the borrower such as death or permanent disability or critical illness, the insurance helps repay the outstanding home loan, either fully or as per the policy terms, subject to the policy terms.
This ensures that the family isn’t burdened with the remaining loan or forced to sell the house to clear the debt. It’s essentially a financial safety net that protects both your home and your loved ones.
Home loan insurance protects the borrower’s outstanding loan in case something unfortunate happens to the borrower. Home insurance, on the other hand, protects the house itself. It covers the structure and its contents of the home against risks such as fire, floods, earthquakes, storms, theft and other covered events.
These policies typically operate as reducing cover plans, where the insurance coverage decreases as the outstanding loan principal is repaid, or level cover plans where the coverage remains constant.
Pros and cons
The biggest advantage of home loan insurance is that it gives the borrower peace of mind. If something unfortunate happens to the borrower during the loan tenure, the insurance helps take care of the outstanding loan, so that his/her family doesn’t have to worry about repaying it or risk losing the home.
Zero GST on online home loan insurance and efficient pricing make it significantly more affordable over the loan tenure.
Also, customers are not locked into rigid premium commitments and can foreclose loans without additional insurance costs.
Customers also have the flexibility to opt for payment terms in line with their requirements. They also have the option to ensure that the claim payouts go directly to the family, offering greater financial autonomy during critical moments.
However, home loan insurance is an added cost. Since the loan balance reduces over time, the cover usually reduces as well. In many cases, a term insurance plan can provide a higher cover at a lower cost while giving the borrower’s family the flexibility to use the claim amount for other financial needs, not just the home loan.
Eligibility criteria and process to apply
The eligibility criteria for home loan insurance are quite similar to life insurance. Most insurers offer it to individuals who have an active home loan and fall within the insurer’s prescribed age limits (18 years -65years).
Additionally, factors such as age, loan amount, loan tenure, occupation, and health condition may be considered while issuing the policy.
For higher loan amounts or older applicants, a medical check-up may be required. Since eligibility norms can differ across insurers, it’s always worth comparing the policy terms rather than relying only on the option offered by the lender.
Any individual can buy home loan insurance directly through an insurer or compare plans online via an insurance aggregator. Applicants typically need to provide basic details such as age, loan amount, loan tenure and health information.
Borrowers can apply directly through public or private sector banks and NBFCs during loan sanctioning, or buy it online with basic declarations.
How does home loan insurance work?
For example, suppose you’ve taken a home loan of Rs 80 lakh for 20 years.
After 8 years, you’ve repaid part of the loan and the outstanding amount is Rs 55 lakh. If the borrower passes away during this period, the home loan insurance policy would pay the outstanding Rs 55 lakh (subject to the policy terms) to the lender. As a result, the family can continue owning the home without worrying about repaying the remaining loan.
Some of the common riders include critical illness cover, which helps if you’re diagnosed with a specified serious illness, accidental death and disability cover, and in some cases, job loss protection that offers temporary assistance with loan EMIs, subject to the policy terms.
Who should opt for it and who should avoid it?
“Home loan insurance can be a good option for people who have a large home loan, are the sole earning member of the family, or don’t already have adequate life insurance,” said Varun Agarwal, Business Head -Term Insurance at Policybazaar.
It provides reassurance that the outstanding loan won’t become a financial burden on the family if something unfortunate happens.
However, if someone already has a sufficient term insurance cover that can comfortably take care of their home loan as well as the family’s other financial goals, they may not need a separate home loan insurance policy, Agarwal further recommended.
Conclusion
It is advisable to compare the cost of a home loan insurance with a term insurance plan. Borrowers must check whether the cover reduces with the outstanding loan or remains fixed, and understand the policy’s inclusions and exclusions and whether there are any optional riders that could add more value.
Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions.
Every financial journey has a turning point. What’s yours?
Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.