Here are a few guidelines on whether you should buy Home loan protection Plans:
The first love letter from your dream girl…an offer Letter of your dream job Or for that matter the loan approval letter of your dream home, all evoke similar kind of emotions in you, but unlike the first two, the loan allotment letter comes with a surprise package. Yes, it is loaded with a hefty premium of Home Loan Protection Insurance Policy!
Well, this is the typical case of most home loan borrowers. Most lenders sell Home Loan Protection Plans (HLPP) packaged along with the loan, with the cost of the premium added to the total loan amount sanctioned.
What are Home Loan Protection Plans?
It is an insurance plan which covers the life of the borrower, to the extent of the outstanding loan amount. In simpler terms, if a home loan borrower passes away, then the insurance company will settle the outstanding home loan amount.
The lenders push the customers to buy these products as it acts as a surety in case of the demise of the borrower and saves the bank from the legal hassles of recovering the house from the deceased’s family.
It is very much necessary to have an insurance cover for your home loan as it will protect your family from losing the property, in the event of your death. But before you jump to buy a home loan protection plan, it is important to understand if it is worthwhile to pay a higher premium.
Features of Home Loan Protection Plans
1. Premium payment
Most plans are single premium policies, i.e. you have to pay the premium only once at the time of purchase. Since the premium is very high, the lenders add this premium to the loan amount, and it is recovered from the monthly instalments of the loan.
For example, if a bank sanctions a loan of Rs.50 lakhs for you and the cost of the home loan protection plan is Rs.1.5 lakhs, then the bank loan is considered to be Rs.51.5 lakhs, and the EMI is calculated on this amount.
Nowadays, some insurance companies have introduced variants with a limited premium paying term of 5-7 years.
2. Life Cover
These plans usually offer life cover equal to the outstanding loan amount. The life cover keeps decreasing as the outstanding loan decreases. The cover ends immediately when the loan is cleared.
3. Optional Riders
Many insurance companies selling Home Loan Insurance Plans, offer optional riders as listed below or even include them as a regular policy feature.
– Accidental death
– Terminal Illness
– Job loss (Up to 3-6 months of EMIs)
The cost of the policy, with these features, is higher than the regular home loan protection plans.
How is Home Loan Protection Plan different from other insurance policies?
Unlike other insurance plans, home loan cover is not available for purchase anytime. It has to be bought if you are availing a new home loan or have an existing home loan. It is a reducing cover policy which includes only the loan outstanding amount at a given time, and only until the end of the loan term.
For example, assume you take a home loan of 50 lakhs for a 20-year term, along with a home loan protection policy. If you make prepayments and reduce the loan outstanding to 40 lakhs, and opt for a reduced tenure of 12 years, then the home loan cover will be only for Rs.40 lakhs for a 12-year period.
These policies should not be confused with similar-sounding insurance policy like Home Insurance, which is an insurance to protect your home against damages caused due to theft, natural calamities, etc.
Is it mandatory to buy a Home Loan Protection Plan on availing home loan?
NO. Though many lenders claim that it shall be binding to purchase these plans, there is no such mandate either from Insurance Regulatory and Development Authority (IRDA) or by Reserve Bank of India (RBI). It is the sole discretion of the borrower to purchase these plans.
Should I buy Home Loan Protection Plans?
No, you should not because…
1. Home Loan Protection Plans are very expensive plans and offer only a reducing risk cover
2. The life cover stops when the loan is cleared. Since the premium is calculated based on the loan tenure, you would have paid the premiums for the full loan term during loan disbursement. If you foreclose the loan, then the premiums paid are not refundable.
3. There is no tax benefit you can avail for the purchase of Home Loan Plans as the premiums are not paid by you but by the bank.
4. If you transfer your loan to another lender, the life cover simple ceases without the return of the premiums, as these plans are not portable.
Also read: Should you invest in a second home or not
Then, what is the alternative?
It is necessary for you to purchase an insurance cover for your home loan liability. The best alternative option is to buy a plain vanilla term plan to the extent of the loan availed and the agreed loan tenure.
Term plans are relatively cheaper, and the life cover remains constant throughout the loan tenure. The premiums of these term plans need not be paid upfront and can be paid annually. If you foreclose your home loan, you have the option to continue paying premiums to continue the life cover or just stop paying the premiums.
For example, assume you buy a Rs.50 lakh term plan to cover your home loan of Rs.50 lakhs for a tenure of 20 years. If you foreclose the loan in 10 years, then the term policy can either continue or be stopped, based on your discretion.
Since the life cover of a term plan does not reduce, in the unfortunate event of your death, your family can defray the outstanding loan with the Death Benefit, and the remainder amount can be utilised by them.
As the term plan is independent of the lender, the policy will still be in force if you change your bank.
It is utmost necessary to have an insurance cover for your home loan liability, but it should not be through a home loan protection plan. A plain vanilla term plan is the best-suited and cost-effective way to cover the risk.