Owning a home is a dream for everyone, and getting one can be a tedious job. There are multiple facets to owning a home. The biggest aspect that comes with the dream of owning a home is financing it. Financing your dream home can be tricky because savings aren’t enough at times. In those times of dire need for capital, home loan insurance comes to the rescue. Home loan insurance allows you to get your dream house without burning a hole in your pocket.
What is home loan insurance?
With home loan insurance, you can be at peace knowing that not all your savings will be exhausted. You can still easily carry out your other financial duties like children’s education, buying a car, medical expenses and so on.
How Does Home Insurance Work?
Every individual buying a house must make sure that they get insurance for the loan as well. Home insurance can be purchased through an insurance company. Home loan insurance acts as a safety cushion for the insured. In an unforeseen circumstance, the insurer repays the outstanding loan amount. Taking a home loan plan is a wise decision that can be taken by the person purchasing a house as well as the lender.
Home loan insurance is also known as Home Loan Protection Plan (HLPP). In this scheme (which is offered by almost all financial institutions), the outstanding or balance amount of the borrower with the lender or the bank will be settled by the insurer in the event of an untoward incident. This may be in the sudden death of the primary borrower or a major accident or job loss that reduces the earning capabilities of the primary borrower.
The tenure of the home loan plan could be the same as a home loan. There are specific terms and conditions to the home loan policy. These depend upon the type of policy you have opted for. Many comprehensive home loan policy in India offer different covers.
By getting home loan plans, the borrower is reassured that if they cannot repay the loan, their family will not be forced to vacate the premises. With home loan plans, the repayment burden will also not fall on the family members.
Many get confused with home loan plan and home plans. Some buy these plans thinking that a home loan is also covered under it. Home insurance covers the damages caused by fire, theft within the house premises, etc., thereby safeguarding the property and providing compensation for physical damages to the house. On the other hand, a home loan insurance benefit is the security that one has for the repayment of their loan in the event of unforeseen circumstances.
Key Takeaways
- Insurance for a Home loan is not mandatory by law
- Home loan plans cover the repayment of the home loan. Home insurance protects the property
- A home loan plan pays off the home loan if the primary borrower is unable to repay the loan due to a sudden demise or loss of earning ability like disability due to an accident.
Is Insurance Mandatory for a Home Loan?
While taking a loan, you are not obliged by law to buy a home loan plan too. The regulatory authorities such as the Reserve Bank of India (RBI) or the Insurance Regulatory and Development Authority of India (IRDAI) have not made it compulsory to buy a home loan protection plan along with the home loan. Before opting for a home loan, confirm if your bank mandates getting a home loan plan along with their specific home loan. Although it is not compulsory, it definitely gives extra safety.
Types of Home Loan Insurance
There are three types of home loan plans.
1. Level Coverage Plan
The coverage remains the same throughout the home tenure.
2. Hybrid Coverage Plan
The coverage is full during the first year of the insurance. The coverage then gradually reduces as the balance amount to be paid reduces.
3. Reducing Cover Plan
Both the outstanding loan amount and the coverage reduce with the tenure.
Reasons Why You Need Home Loan Insurance
1. Protects Your Investment
This protects the investment against unforeseeable events, such as death, accidents, or job loss of the borrower. It settles the loan despite unfavourable circumstances.
2. Easy Premium Payment
Most home insurance plans are single premium policies. This means that you have to pay the premium only once. Because of high premiums, lenders give the option of adding the premium to the loan amount. This way premium is deducted along with the EMI.
3. Tax Benefits
This insurance gives you tax benefits under section 80C. Please note that if you are adding a premium to your loan amount and paying the premium through EMIs, you don’t get the tax benefit.
Difference Between a Home Loan Insurance and a Home Insurance
When we talk about what is home loan insurance, knowing the difference between home loan insurance and home insurance is mandatory. This chart will help you understand the difference along with the home loan insurance benefits.
| Parameters | Home Insurance | Home Loan Insurance |
| Premium | Lower premiums as compared to home loan insurance | Higher premiums as compared to home insurance |
| Accessibility | It can be availed whether you have home loan insurance or not | It can be availed only if home insurance is in place |
| Down Payment | No impact on the down payment | Helps to reduce the down payment of the house |
Home Loan Insurance Premium
The amount of money you pay for home loan premium installments depends upon factors like
- The total home loan amount.
- The type of cover you have opted for.
- Your age – the younger you are, the lesser the premium since your repayment capacity is for a longer tenure (retirement age is further away).
- Medical records – the more physically fit you are, the lower the premium.
Other factors to consider while availing of home insurance are that only people above the age of 18 can opt for it. The maximum eligibility age for a home insurance is 50 to 60 years.
Home Loan Insurance Calculator
A home insurance calculator is an online application that allows homeowners to calculate the premium amount for a home insurance policy. It enables customers to obtain an estimate of the premium amount payable when purchasing house insurance. It also enables consumers to compare the premiums payable under various house insurance plans. Thus, the home insurance premium calculator is a tool that enables homeowners to determine the amount of premium they are likely to spend to cover their home and its contents.
Read more to know about How to Calculate Your Home Insurance Premium.
Aspects to be Considered Before Opting a Home Loan Insurance
The majority of home loan insurance plans have diminishing coverage. The size of the coverage is determined by the amount of the outstanding mortgage. As a result, when a person repays a loan, the total covered decreases. However, in the case of term insurance the coverage remains constant.
For term plans, the nominee receives the sum promised and can make payments to the lender or bank to settle the debt. In the case of a home loan insurance plan, the insurer makes direct payments to the lender for the outstanding house loan in order to settle the loan.
It is critical that you inquire about the riders and add-on coverage. It is advisable to have a plan that covers scenarios such as unemployment, disability, and death. Check to see if the insurance just covers natural death or also covers accidental death.
The loan term and insurance coverage duration must coincide. It is not wise to choose a lesser coverage term with the intention of later extending it. In the long term, there is a very good risk that you will forget to expand. Furthermore, as you become older, it gets increasingly harder to obtain enough coverage. Even if you do acquire one, it will be somewhat costly.
Pros and Cons Home Loan Insurance
Pros
- Under Sections 80C, 80D, and Section 10(10D) of the Income Tax Act, the borrower receives tax benefits from the home loan, which extends to the home loan premium as well.
- Add on covers like critical diseases (including cancer and heart attack) or other medical conditions like disability can also be covered in a home loan plan by paying an extra premium.
- In the case of a joint home loan plan, all borrowers can be covered by a single home loan insurance.
- The amount can be paid on a yearly basis and settled in the home loan amount. The borrower also has the flexibility to reimburse the premium, which is a single /whole payment premium.
- Lump-sum compensation is given by the home loan insurance, which can be utilized to repay the outstanding home loan.
- Borrowers have the option of switching insurance premiums into the amount that can be added to the home loan EMIs.
Cons
- Home Loan Plans do not cover death due to natural calamities or war.
- Home Loan Plans cannot be claimed if the person commits suicide.
- The policy would lapse in case of home loan restructuring, home loan balance transfer or full repayment of the loan.
- It is an added cost in addition to the home loan EMIs.
Conclusion
Now that you know what is home loan insurance, you can make a wise decision when opting for one. Before taking a home insurance policy, you should discuss your requirements with your insurance company and accordingly take the one that best suits your needs. Although it is not mandatory to take a home policy insurance, it is advisable to take one to enjoy a stress-free life.
Frequently Asked Questions (FAQs)
You can multiply the built-up area of the property by the cost of construction per square foot to arrive at the valuation of the property for home loan insurance benefit purposes. Typically, the insurance provider will do the valuation for you.
The policy stands cancelled once the ownership transfer shifts to someone else. The insured ceases to be covered. Some home loan insurance policies refund a portion of the premium paid in case the house is sold.
The insurance term expires once the outstanding home loan amount has been paid. Check your insurance policy for the terms and conditions for a refund.
Yes, it’s always recommended to take insurance on a home loan.
The cost of home loan insurance can depend on a variety of factors. You can use a premium calculator to get a better estimate.
No, it’s not mandatory to buy home insurance. However, it is recommended.
The loan-to-value ratio is used to determine your mortgage default insurance premium. Insurance premiums for residences with less than a 20% down payment will range between 2.8% and 4% of the mortgage amount.
If the family or legal successors are unable to settle the outstanding loan, the lender may seize control of the residence under the SARFAESI Act. “The lender then sells off the property to recoup its losses,” Shetty explains. However, seizing control of the property is the bank’s final resort.
