Home Loan Insurance: Way to Secure Your Home Loan
Mahadev Desai is the Founder and CEO of gharpedia.com and SDCPL a leading design consultancy firm having strong national presence. He has a degree in Civil Engineering (BE) and Law (LLB) and has rich experience of 45 years. Besides being the Editor in Chief, he also mentors team at GharPedia. He is associated with many professional bodies. He is also co-founder of 1mnt.in the first in Industry software for contractors’ billing. He is a voracious reader, edited 4 books, and pioneer of book reading movement in Gujarat, India.
Buying a house is a matter of big investment. Most of the family across India cannot save enough to buy a house on their own. Hence, they mostly take a home loan. But the problem arises if the borrower, unfortunately, passes away and the family cannot pay the EMIs, and further becomes clueless to repay the loan. This mishap can be prevented by taking a home loan insurance, which can protect the family from such a burden and safeguards the lenders’ money as well.
Before going into the details of housing loan insurance, let us understand the basic meaning of insurance and its types.
Insurance in general terms refers to a contract by which a company (insurer) provides a guarantee of paying compensation in return of the payment of a specified premium to an individual in case of some pre-mentioned circumstances or unforeseen catastrophes that may arise.
Types of some popular Insurance
There are many types of insurance: some of the most common variants are,
01. Life Insurance
02. General Insurance
03. Health Insurance
04. Vehicle Insurance
05. Home Insurance
06. Home Loan Insurance
07. Travel Insurance
08. Moving Insurance
09. Pet Insurance, etc.
In this article, we will be discussing about home loan insurance.
Is Home Loan Insurance and Home Insurance the Same Thing?
Although sounds similar, home loan insurance and home insurance are not the same. There are some basic differences.
01. Home Insurance
Home insurance, also known as Homeowner’s insurance, is an insurance policy that covers and ensures an individual against any damage to one’s home along with the moveable properties inside. This insurance policy covers damaging events such as Fire, Robbery, Flood, Earthquake, Landslides, etc. It may also cover maintenance costs, such as wall fixings, restoration, etc.
02. Home Loan Insurance
Home loan insurance is also known as home loan protection plan. It is an insurance policy in which the insurance company provides a guarantee to an individual to repay the outstanding home loan amount in case of some unsought circumstances such as the death of the borrower happens.
In short, home loan insurance plan provides coverage for the borrowed home loan amount while on the other hand, home insurance provides protection against any damage to the built/bought home. Apart from HLPP (Home loan protection plan), one should know about term insurance, which can serve the same purpose.
Term insurance is the type of life insurance that provides coverage for a certain predetermined period of time that is if a person with term insurance dies while the policy is in force or active, only then a death benefit will be paid. Term insurance becomes void once the term mentioned in the policy gets over.
What is a Home Loan Insurance?
As told before, Home loan insurance also known as Home Loan Protection Plan (HLPP).This insurance scheme is offered by financial institutions to individuals (borrowers). Under the policy protection, the insurance provider gives an undertaking to pay the lending bank or the financial institution the outstanding amount of home loan in case of any circumstances such as the death of the borrower takes place.
I know the story of my friend who had borrowed a home loan from a nationalized bank. The bank manager was wise enough to insist my friend on taking one such home loan protection plan or taking a life insurance policy and endorsing it in the name of the bank, i.e. to appoint the bank as a nominee, in case of any unfortunate event occurs. After repaying for 3 years, my friend suddenly passed away. He was the only breadwinner of the family, and family had no other source of income. However, on account of this policy, the insurance company fully paid the outstanding loan to the bank and the family was free from the tension of repayment of the housing loan particularly in the absence of the breadwinner. One would never realize the importance of home loan insurance unless any such events happen.
Types of Home Loan Insurance Plan
Insurance companies provide mainly three types of home loan insurance plans, namely level cover plan, hybrid cover plan, reducing cover plan.
01. Level Cover Plan: Under this plan, the coverage remains the same throughout the loan tenure.
02. Hybrid Cover Plan: The coverage in this plan remains full in the first year and then starts decreasing as the outstanding amount reduces with tenure.
03. Reducing Cover Plan: Both the coverage and outstanding loan get reduced with the tenure.
Is Home Loan Insurance Compulsory?
There is no regulation or compulsory requirements set by RBI or IRDAI to opt for a home loan insurance while taking a home loan. One can avail it if one wishes to lessen the risk and can take it as an added advantage. But it is always a matter of personal discretion.
Main Aspects of Home Loan Insurance
The borrower can choose to pay the insurance amount in one premium, or it can be added to his/her loan account, and it can be paid in installments or it can be clubbed with the EMI. Under a joint loan, only one home loan insurance can cover all the borrowers. By paying some extra premium, one can also cover medical illness like disability and critical illness as well as in-home loan insurance. However, it does not cover suicide. The policy will get lapsed when the full repayment of the home loan is done.
Home Loan Insurance also covers certain types of medical illness such as cancer, heart attack and many more. If the home loan protection plan (HLPP) is paid in a single premium, then an individual will not be able to port the lender in case he wishes to change the lender (Transfer of the loan amount to another financial institution).
Does a Home Loan Protection Plan Gets Tax Benefit?
It is necessary for the buyer to know that premium paid for home loan insurance is included in the amount of home loan. Thus, it offers tax benefits under Section 80C (The maximum Tax benefit under Section 80C is Rs 1,50,000).
Home Loan Insurance Plan (HLPP) Vs Term Insurance
01. Life Cover
HLPP only covers outstanding Home Loan amount, while term Insurance covers a pre-decided amount that will be paid in case of the death of the individual during the specified term.
02. Reduction in Cover
While in HLPP, the insurance coverage starts decreasing as the principal loan amount gets decreased while the coverage in a term insurance policy remains the same. For example, you may opt for an HLPP on a home loan of suppose 25 lakhs today. Now suppose after 5 years with the payment of EMI’S, the principal has reduced to 21 lakhs. Accordingly, the HLPP coverage will also decrease at the same amount. When the loan will be fully paid, the HLPP coverage will decline to the zero point. On the other hand, if you purchase a term Insurance of 25 lakhs, it will remain the same for the specified term. Apart from this, the term insurance policy is more flexible than HLPP.
One needs to consider all the aspects and compare the policy benefits, and then should decide the better option for further proceeding. Home loan insurance is an exclusive policy for insurance against home loan while term insurance can be viewed as a type of life insurance but can work as an option against home loan insurance.
In the final note, a home loan insurance policy is a good option available to an individual who has taken a home loan and wants to protect his/her family from the burden of repayment of home loan in case of any unforeseen circumstances. Although it is not compulsory to purchase a home loan protection plan (HLPP), it is always solicited for a loam loan buyer for better safety of his family. However, as a policy buyer, you must first look at all the available options and then decide yourself about the loan protection option to be chosen.
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Co-Author: Het Desai