Most types of insurance covers are offered on assets like the life of an individual, a house property, a vehicle or any other valuable resource. However, there’s also a type of insurance offered on a debt facility. We’re talking about home loan insurance. As the name indicates, it is a type of coverage offered on home loans. But beyond this, what is a home loan insurance plan, how does it work, and do you need it?
Let’s find out.
What is Home Loan Insurance?
Home loan insurance, also known as mortgage insurance or a home loan protection plan (HLPP), is a type of insurance that covers the loan taken for buying or building a house property. It protects the lender and the borrower in different ways during unforeseen circumstances like the borrower’s demise.
Home loans are typically long-term commitments that can extend up to 30 years or so. During this period, any kind of contingency could occur. The borrower may pass away, or they may be unable to repay the loan due to loss of income triggered by unfortunate circumstances — like unemployment, accidental disability or a critical illness diagnosis.
In such cases, the burden of repaying the loan could fall on the borrower’s family members. Alternatively, the lender may take possession of the house property, which is the collateral for the loan. This could leave the borrower’s family without any place of residence. Similarly, for the lender, the risk of the loan becoming a bad debt is high if any of the above-mentioned contingencies occur.
If the borrower is unable to repay the loan, the payouts from the home loan insurance plan can help compensate the lender. This relieves the borrower’s family members from the burden of the debt and helps keep their residence from being seized by the bank.
Types of Home Loan Insurance
Depending on the type of coverage offered, home loan insurance can be of the following types:
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Level Cover Insurance
In this type of mortgage insurance plan, the cover offered remains the same during the entire tenure of the home loan.
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Reducing Cover Insurance
As the name indicates, in this type of home loan insurance plan, the sum assured decreases as the outstanding balance of the loan reduces with each repayment.
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Hybrid Cover Insurance
Here, the cover offered remains fixed during the first year of home loan repayment. Thereafter, it reduces on an annual basis from the second year.
Features of Home Loan Insurance
Now that you know what home loan insurance is and how it works, let’s take a closer look at the main features of this cover. Keep in mind that the exact features may vary from one policy to another, so it’s crucial to read the terms and conditions of your home loan insurance before you purchase it. Generally, the common features include the following.
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Optional Coverage
Mortgage insurance is not mandatory in India. It is an optional cover that you can purchase at the time of availing a home loan. Neither the Insurance Regulatory and Development Authority of India (IRDAI) nor the Reserve Bank of India (RBI) insists that home loan borrowers must also purchase home loan insurance.
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One-Time Premium Payment
When you avail of a home loan, many lenders may offer you the option to purchase home loan insurance with a one-time lump sum premium payment. This amount is typically clubbed with the home loan itself. For example, if you are borrowing ₹40 lakh via a home loan and need to pay ₹5 lakh as the total premium for your home loan insurance plan, you can choose to borrow ₹45 lakh instead (clubbing the premium with the loan). However, this can be a tricky proposition because of the following:
- It increases the EMI you will have to pay for the loan.
- It makes it difficult for you to discontinue the home loan insurance plan if you need to.
- You may find more affordable premium rates from other insurance providers.
To work around these possibilities, ensure that you evaluate your risk and home loan insurance requirements independently before you purchase a cover. Since it is not mandatory, you are not obligated to buy home loan insurance, much less from the lender itself.
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Add-On Rider Benefits
If you decide to purchase a home loan insurance plan, you can also complement the coverage offered by the basic policy with add-on riders. These riders may offer financial benefits in case of contingencies like a critical illness diagnosis, accidental disability or unemployment.
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No Maturity Benefits
The primary purpose of home loan insurance is to cover the outstanding balance of your home loan in case something untoward happens, and you are unable to repay it yourself. So, this type of insurance typically does not offer any maturity benefits.
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Coverage for Joint Home Loans
You can also purchase insurance coverage for joint home loans. All the co-applicants of the loan will be covered under the home loan insurance plan, and in case of any of their demise, the insurer will step in to cover the appropriate dues.
Should You Buy Home Loan Insurance?
Having seen how home loan insurance works and what its key features are, you may be in a dilemma about purchasing this type of cover. If you’re not sure this is the right option, you could opt for term insurance — which gives you a significant cover on your life at affordable premiums. By matching the policy term with the loan repayment term, you can ensure that if something happens to you, your family can use the payouts from the term plan to repay the home loan. Additionally, you get tax benefits for the term insurance premiums.
However, it may be a good idea to buy home loan insurance if:
- Your term insurance covers other obligations
- You have opted for a joint home loan
- You want specific coverage in case of unemployment
- You find a mortgage insurance plan that’s more affordable for you
Conclusion
All in all, a home loan or mortgage insurance plan is not mandatory, but it can be beneficial. Now that you know what home loan insurance is and how it works, you can make an informed decision about whether or not you want to opt for it when you avail of a home loan. If you do decide to purchase the insurance, ensure that you pay your premiums on time to keep the coverage active.