At the time of taking a home loan, most banks insist on a mortgage insurance, which covers the loan amount in case the borrower dies before clearing the loan. One must evaluate the pros and cons before taking such a policy as it is more expensive than a pure term plan and cannot be ported to another lender in case of loan balance transfer.
A mortgage insurance plan or home loan protection plan is a single premium product and the sum assured is linked to the loan amount. While it is not mandatory to take this policy when availing a home loan, the bank may urge one to buy it due to its financial interest in the property and life of the borrower.
The premium amount is bundled with the loan amount, adjusted with the equated monthly installments and the policyholder even pays interest on the borrowed premium amount. The sum assured decreases along with the outstanding loan amount and the overall coverage reduces as the loan tenure comes down.
Unlike a term insurance plan, a mortgage insurance plan is an agreement between the bank and the insurer and the latter settles the outstanding loan on behalf of the policyholder in case of death. The plans offer joint life cover for co-borrowers and there is no maturity benefit.
Term plan a better option
On the other hand, in a term plan the sum assured stays the same through the policy period and is less expensive compared to home loan insurance. Experts say it is better to have a term insurance plan because its duration will not end with the loan tenure. A term plan will offer a fixed sum assured payout and the amount will not depend on the outstanding loan amount. The entire sum assured is paid in case of death of the policyholder.
For instance, if a policyholder has taken a loan of `50 lakh for 15 years and has also bought a term cover of `50 lakh, if he passes away in the tenth year, the family will get the entire `50 lakh, from which they can repay the outstanding home loan and keep the remaining amount. Moreover, if an individual buys a term plan, he can even opt for a critical illness rider for additional benefits.
Rakesh Goyal, director, Probus Insurance Broker, says as home insurance is a single-premium plan, it is more expensive as compared to a pure term plan. “In a home loan protection plan, the policyholder is paying the entire premium upfront. It is better to have a term plan while taking a home loan because home loan coverage will keep decreasing every year and will become zero when the loan is completed. Whereas in a term plan, a policyholder can get coverage even up to 100 years.”
Take note
An individual must check the coverage, surrender value, rider plans, and portability before buying any home loan insurance. In case of a balance transfer of the loan to another bank, the plan cannot be ported to the other lender as it is under the master policy between the lender and the insurance company. Also, if the borrower does loan foreclosure, the mortgage insurance will terminate.
As most loans are paid within a period of 10 to 12 years of the loan origination, the borrower loses out on the premium paid for the mortage loan for the entire contract period of the loan. If an individual opts for a home loan insurance, the premium should be paid from his own funds and not financed through a loan as the interest amount will rise if the central bank increases the benchmark rate.
If an individual opts for a term plan to protect home loan, then he should take a plan which has a policy period equal to or more than the loan tenure. The sum assured must be more than than the loan and the total interest repayment amount over the entire period of the loan. Also, the sum assured should be adequate to take care of the family’s financial needs after repaying the home loan.
In case, the borrower had purchased a term plan to secure the family’s needs even before taking the home loan, he can buy another term insurance plan to protect the home loan. Alternatively, the policyholder can opt for an increasing term insurance policy where the sum assured increases annually. The increase can be either a fixed amount or a percentage of the original sum assured at policy inception depending on the terms and conditions of the life insurance company.
RISKY MOVES
A mortgage insurance plan is a single premium product and the sum assured is linked to the loan amount
The premium amount is adjusted with the EMIs and the policyholder has to pay interest on the borrowed premium sum
If the borrower goes for loan foreclosure, he loses out on the premium paid for the entire loan tenure