Home loan insurance can be beneficial both for the lender and the borrower. However, it’s critical make an informed decision factoring in your financial requirements.
Buying a home, a place of your own, is a dream most of us strive to fulfil. That being said, if you have taken a home loan, you may have had to deal with lenders pushing some form of home loan protection plan at you at the time of loan approval. Although such home loan protection plans, commonly known as mortgage insurance or home loan insurance, are not mandated by any regulatory body, lenders insist that you get a home loan insurance so that they can protect themselves against credit or lending risks.
This is not to say that home loan insurance protects only the lender. It can be beneficial to you (the borrower) as well. Say, for example, if the lender dies before clearing the home loan in full, the mortgage insurance plan can pay off the outstanding loan amount to the lender if the insurance policy allows for such a provision.
Let’s dig a bit deeper on this.
So, what exactly is home loan insurance?
This is a type of insurance plan that offers you (a home loan borrower) coverage against loan repayment risk for the period of the loan tenure. In the event of your sudden demise or disability (or even temporary job loss in some cases), the insurer will pay the outstanding loan amount to the lender. In this way, both the lender and your dependents are protected as the burden of debt liability will not fall on the shoulders of your spouse or heirs.
Lenders, usually, offer a single premium insurance plan with your home loan. Under such a plan, the single premium amount is likely to be added to your home loan and subsequently, there will be an increase in your home loan Equated Monthly Instalment (EMI). At times, lenders seek a separate premium payment during the loan approval process.
How beneficial is home loan insurance?
The surviving family members will be saved from taking up the responsibility of settling your loan liabilities after your demise during the loan tenure.
There will be a marked decrease in bad debts for the lender, i.e. the number of loans turning into bad debts every year will reduce when the loans are paid off by the insurance company when the borrower is unable to do so.
Opting for a loan protection plan can work in your favour when applying for a home loan as lenders tend to look at credit or lending risks before approving or rejecting a loan application. With a loan protection plan, the chances of you defaulting on a loan are negated.
Term insurance Vs. Mortgage insurance
Two ways by which you can get protection against loan repayment risks are a term insurance plan and a separate home loan protection plan. A term insurance plan, upon your demise, will pay out a lump sum amount as a death benefit to your dependent or beneficiary who in turn can use it to pay off the outstanding loan amount.
Home loan offers tax benefits of up to Rs 2 lakh on the interest paid under Section 24B, and now an additional benefit of up to Rs 1.5 lakh under Section 80EEA for loans on property valued not more than Rs 45 lakh after the Finance Minister Nirmala Sitharaman’s Union Budget 2019 speech. Also, the home loan principal component and term insurance premiums can be used to claim tax benefit of up to Rs 1.5 lakh under Section 80C. As such, if you’re yet to exhaust your 80C tax benefits, another term insurance for home loan protection can help you do the same.
Term plans are low-cost, pure risk cover plans with no maturity benefit. Mortgage insurance and term insurance may seem similar in terms of cost, add-ons such as critical illness cover, disability cover, unemployment cover, etc. depending on the policy terms and conditions. Both come with no maturity benefit. However, they do differ in various other ways. Let’s discuss some of them to help you make a decision.
Which one should you go for?
When it comes to the cost of insurance premium, term insurance is more affordable as the premium for a separate loan protection plan is comparatively higher when it is added to the overall cost of the loan.
In terms of coverage, a term plan is an umbrella cover that pays out death benefit which can be used for any purpose. Whereas a home loan insurance plan covers only the outstanding loan amount. Therefore, the sum assured will decrease over the policy term (as the loan gets repaid) until it becomes zero.
However, when refinancing a home loan or changing its tenure to suit your loan repayment capability, the tenure of the existing home loan insurance plan can’t be changed. Also, insurance portability is not allowed under home loan protection plans if you decide to switch lenders.
Also, under term plans, life cover can be increased to include your sanctioned loan amount, but the same can’t be done in the case of home loan protection plans.
If you choose to foreclose the loan, the one-time premium paid for home loan insurance will not be refunded.
The key is to make an informed decision
If you already have adequate term insurance coverage, you may not need another insurance to cover your loan. However, it’s critical to underscore that the sum assured of your term insurance plan should be at least 10 times your current annual income.
On the other hand, if you are not adequately insured, this might be a good option as you can enjoy additional tax benefits while safeguarding your family against a major financial liability. Since home loan insurance is optional, you can make an informed purchase decision by taking the above into consideration and based on your financial requirements. However, avoid buying a plan just because your lender pressurizes you to do so, especially when you already have adequate term insurance coverage.
(The author is CEO, Bankbazaar.com)