While taking a home loan from a bank or from any other lending institution, one may be asked to buy an insurance policy as well. The lender will, typically, want to ensure that the loan amount is repaid in the event of the death of the borrower before the outstanding loan is paid off. In fact, it is always better to make sure that the loan liability is adequately covered through an insurance plan. However, buying insurance from the lender is not compulsory.
Banks generally offer a single premium insurance plan equal to the amount of loan amount. To make the deal lucrative, some banks may add the amount of premium to the loan amount resulting in a small increase in EMI.
Further, there is no requirement to be met to furnish proof of insurance to the lenders. As a borrower one is not obliged to buy insurance at the time of taking a home loan or a personal loan. It is entirely the borrower’s discretion to buy an insurance policy to cover the loan amount or not.
Ideally, one should have a life insurance coverage of at least ten times one’s annual take-home income. This will help in maintaining the standard of living of surviving members of the family. In addition, if there are liabilities such as a home loan, one should buy additional coverage. Once the loan liability gets over, the additional sum insured (life insurance policy) taken for that purpose may be dropped.
Term insurance plans fit the bill in taking a high amount of coverage at an affordable premium. Even loan liabilities may be covered by buying term plans. One is allowed to buy term insurance plans from multiple companies, however, proper disclosure has to be made about that.
It has been observed that a 15-year home loan, typically, gets repaid in a span of 7 or eight years. Therefore, paying a single premium for a term plan may not help much. Instead, buy additional coverage through a term insurance plan, and being a separate plan, you can stop paying the premium once the loan liability is over. At this stage, you may still review the life insurance needs and may even continue with the plan.
If you already have a term insurance plan then buy another policy from the same or another insurer with an amount equal to the amount of a home loan. So, if you already have a Rs 1 crore term insurance cover and the loan is of Rs 40 lakh, then get an additional cover equal to the loan amount.
Keeping your loan liability covered with an insurance policy is essential but buying it from the lender is not mandatory. Make sure the day you have the loan disbursed in your name, you have adequate life insurance to cover it.