Home Loan Insurance: Types, Plans & How to Avail (2023)
Home loan insurance or mortgage insurance is given to home loan borrowers to protect them and the lender during unforeseen circumstances. Let’s say someone takes a home loan for 20 years but meets with an untimely demise. In such a dire situation, the entire burden of repaying the home loan can fall on the family members. This is where having home loan insurance could help.
With home loan insurance in place, the insurer ensures that the outstanding loan is paid in full to the lender. You can get a home loan insurance cover from the same bank or housing finance company (HFC) from which you have gotten your loan. Some lenders provide insurance cover against factors other than death, like loss of a job or critical illness. The premium paid towards the insurance plan is eligible for tax deduction benefits.
Types of Home Loan Insurance Plans
1. Level Cover Plan
In the Level cover plan, the coverage amount stays the same throughout the home loan tenure.
2. Hybrid Cover Plan
In a Hybrid cover plan, the coverage amount for the insured stays the same during the first year, but keeps reducing from the second year onward along with the decrease in home loan outstanding balance.
3. Reducing Cover Plan
With this plan, the coverage amount decreases along with the outstanding home loan balance.
Note that term insurance and home loan insurance share almost the same benefits. However, there are a lot of differences between home loan insurance and home insurance. Let’s check out the major differences between the two.
Features of Home Loan Insurance
- Lump-sum payment: The premium amount of the home loan insurance cover can be paid in one go. Buyers can also club the premium amount with the total loan and pay it through monthly instalments.
- Add-ons and riders: The basic HLPP will cover the demise of the borrower. But by getting a rider scheme that charges some extra premium, your home loan protection plan can cover some critical illnesses like heart attack, cancer, and injuries. The add-ons can also cover disabilities and being jobless up to 6 months of EMI payment.
- Joint home loan borrowers: All co-applicants who are under the same home loan are covered by the home loan insurance plan. Thus, if 3 family members insure their home loan, then an untimely demise of one of them will be covered by the home loan insurance plan that they have availed.
Different Home Loan Insurance Plans
The insurance plans vary according to insurance coverage. Thus, there are three different plans available:
- Level cover plan: Under this plan, the insurance coverage remains the same all-round the loan tenure. This is the most basic plan.
- Hybrid cover plan: Under this plan, the coverage remains full for the first year, but then it reduces as the balance amount goes down with tenure.
- Reducing cover plan: Under this plan, as the tenure comes to an end, the coverage and outstanding loan amount reduces.
Also read: How To Choose Banks/NBFCs For Home Loans?
The Importance of Getting Home Loan Insurance for Borrowers
1. Assures protection for the family
Repaying a loan on someone else’s behalf can be burdensome. If you are unable to repay it, the collateral against which the loan was taken could be seized. Home loan insurance does not let you reach that stage. It ensures that the family of a borrower does not have to go through a difficult time after the loss of a crucial family member.
Property insurance for home loan policy follows a one-time premium scheme where the premium is paid in one go. But if someone’s family cannot afford to do so, the premium could be added to the loan amount and is deducted through EMI. This makes paying this premium more affordable.
3. Tax benefits
Getting a home loan protection plan is a good way of getting a tax deduction. Under Section 80C of the Income Tax Act of 1961, you can get tax benefits on the premium paid against the insurance.
The Importance of Home Loan Insurance for Lenders
1. Protects lender against loss
Banks and housing finance companies make most of their earnings through the interest earned by lending home loans. If a borrower is unable to pay, it’s a loss for the lender too. With home loan insurance, the insurer financially protects their source of income.
2. Avoids bad debt situation
A bank faces many instances when borrowers are unable to repay the loan. This puts the lender in a position of bad debt. This debt can hamper the full functioning of banks and the loans it lends to other active members. Thus, property insurance for home loans avoids the crumbling down of the loan system.
How Does Home Loan Insurance Work?
A home loan insurance policy works on the same principle as term insurance. A lender covers a borrower’s home loan scheme till the entire tenure of the loan. Once the loan amount is repaid, the insurance plan also expires. If a borrower passes away during the loan tenure, the insurer, through property insurance for a home loan, settles the outstanding loan amount with the lender (subject to terms and conditions).
A home loan protection plan (HLPP) ensures that an insurance company protects the banks or HFCs. The insurance company will settle any loan amount that the borrower’s family could not pay. This also protects the family from losing their property or their collateral.
Also Read: Minimum CIBIL Score For Home Loan In 2022
How to Avail of Home Loan Insurance?
Usually, borrowers get insurance against home loans while they are procuring the loan. You can get a protection plan with the same bank or HFC that you obtained the loan.
But it is important to remember that insuring your housing loan is not mandatory. Many banks try to include insurance plans compulsorily with home loan schemes, which is wrong. A borrower can also avail of these policies at a later date. Lastly, at the time of balance transfer, you can restructure the insurance plan.
Things to Consider before Opting for a Home Loan Insurance
Getting a home loan insurance is something which you should definitely consider before procuring your loan. However, there are certain important factors that you need to consider first.
- Insurance cannot be force-fed: Remember that signing up for a home loan insurance is not mandatory. So, if you think that you don’t need it, don’t buy it.
- Be informed regarding the different types of home loan insurance: There are three types of home loan insurance plans. They are level cover plan, hybrid cover plan and reducing cover plan. Know these plans thoroughly and sign up for the one that suits your requirements.
What are the Differences Between Home Insurance and Home Loan Insurance?
| Home insurance | Home loan insurance |
| Home insurance protects borrowers against structural damages to their house and its appliances. | Home loan insurance protects a borrower’s family in situations when there is an outstanding loan amount due to a borrower’s death. |
| The tenure of home loan protection insurance is chosen by the borrower and can be taken for up to 30 years. | The tenure of a home loan insurance policy is as long as that of a home loan. |
| Most housing loan insurance policies cover damages caused by natural disasters or theft. They also cover the costs of repairing and managing one’s house. | Home loan insurance schemes offer protection against the untimely death of a borrower. Some have rider schemes covering terminal illness and disabilities. |
Also read: Fixed-Rate Vs Floating Rate Home Loan
Riders and Add-On Benefits under Home Loan Insurance
Home loan insurance plans can come with additional riders or add-on benefits. These riders could cover specific diseases and conditions like critical illnesses, accidental deaths and disabilities to name a few.
However, note that buying riders along with your home loan insurance could significantly increase the total cost of your home loan insurance policy.
Term Plan Vs Home Loan Insurance: Which one should You go for?
A term insurance plan also protects your family if anything untoward happens to you. In case of your untimely demise, the dependent or beneficiary can get a lump sum as a death benefit, which in turn can be utilised to pay off the outstanding loan. A term insurance plan also works as an umbrella cover that pays out a lump sum as a death benefit, where the amount can be utilised for any purpose. Also, since it’s just an insurance plan, the premiums are also on the lower side.
For home loan insurance, the premium is comparatively higher. Also, the sum assured reduces over the tenure of policy term as the loan gets repaid. Also, in most cases, insurance portability is not allowed if you’re planning to switch lenders. But if you want to enjoy additional tax benefits while safeguarding your family members from unforeseen circumstances, opting for a home protection plan could be a good option. Also, if you’re not adequately insured, a home insurance policy would be an added benefit to have.
So, make an informed decision and sign up for the one that caters to your priorities.
Final Word
Home loan insurance provides a security cover to both lenders and borrowers. As the need for housing loans has increased, it is important for more borrowers to be aware of this insurance. This would protect their family and assets in case of unfortunate situations. However, these insurance policies are not mandatory for home loans.
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FAQs
Ans: Yes. Borrowers are eligible for tax deductions for the premium paid on home loan insurance under Section 80C and Section 10(10D). The maximum amount that can be claimed under Section 80C is Rs. 1.5 Lakhs.
Ans: Unlike other policies, you have a lump-sum premium payment as the only option. Probably that’s one of the reasons why many borrowers refuse to sign up for a policy. The premium amount is added to the home loan amount, thereby increasing the overall cost of your loan. The insurance amount may vary from lender to lender.
Ans: In India, unlike home insurance, home loan insurance is usually non-refundable. Your home loan insurance is valid till the tenure of the loan.
Ans: Though it’s not mandatory to sign up for a home loan insurance plan, it’s advised to have a policy in place. You can either choose to have a term insurance plan that covers your home loan or a separate home loan protection plan. The reason is if anything untoward happens to you, your family shouldn’t bear the burden of the loan. The protection plan also ensures that the lender is reimbursed for the outstanding loan amount.
Ans: Before choosing an insurance scheme that protects your home loan, it is important to analyse all three different coverage plans available. Borrowers should remember that this insurance plan protects your home loan and not your home. The age, medical record, loan amount and loan tenure also impact your insurance premium.
Ans: Add-on and rider schemes are different for every financial institution. Generally, rider schemes cover terminal illness and some critical disabilities. They can also include a period of joblessness.
Ans: RBI guidelines state that home loan insurance cannot be made mandatory by any bank or HFC. Still, it is an added benefit when seen in a broader picture.
Ans: No, home loan insurance plans do not cover death caused by natural calamities like storms, floods, tsunamis or war.
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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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