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Everything You Need To Know About Home Loan Insurance

Home Loan Insurance

Home loan insurance is very popular among home loan borrowers these days due to the increase in the prices of properties and the unpredictable future.  If you are a potential home buyer, you must learn about this kind of insurance, how it works, and the benefits thereof. However, to understand how home loan insurance works, we must first know what home loan insurance is.

In this article below, we shall discuss what is home loan insurance, the importance of home loan insurance, the features of home loan insurance benefits of home loan insurance, and everything else one needs to know about home loan protection.

What Is Home Loan Insurance?

What Is Home Loan Insurance

A home loan insurance is a home loan protection plan, which provides support to the borrower by covering the home loan in the event of unforeseen and unexpected events. In the case of home loan insurance, if the borrower fails to repay the whole loan amount, the insurer settles the outstanding home loan amount with the lender.

Home loan insurance plans help the borrower in dealing with the unpredictable nature of human life. With home loan protection plans, the borrower is ensured that the weight of the house loan will not fall on his family members in the event of unforeseen circumstances.

Importance of Home Loan Insurance Plans

In the event of nonpayment of home loans by the borrower, home loan insurance can cover the entire loan amount of your home loan. Hence a home loan insurance plan is important for both, the lender and the borrower.

1. Importance Of Home Loan Insurance Plan For Lenders

Home loan insurance is important for the lender because banks and non-bank financial institutions make a lot of money from home loan interest rates. The lender’s normal sources of income are affected when the borrowers default to pay the loan. As a result, lenders will benefit from home loan insurance.

2. Importance Of Home Loan Insurance Plan For Borrowers

Home loan insurance is important for borrowers since it ensures that if the borrower fails to repay the loan, the insurer will do so on the behalf of the borrower. In this situation, the borrowers or their family members will not be burdened by the house loan during a financial crisis.

Furthermore, because the home loan is secured, the lender can seize the borrower’s home if the loan obligations are not met. Home loan insurance, on the other hand, ensures that the borrower retains ownership of the home even if he or she defaults.

How Does Home Loan Insurance Work?

In an event of the unforeseen death of the Home Loan purchaser, the insurance company has to pay the total outstanding loan amount to the Home Loan lender. Generally, Home Loan lenders and an insurance company have a tie-up and the insurance is recommended by the lenders. If you, as a Home Loan purchaser, don’t want the insurance via the tie-up, you can buy the insurance from a third party as well. Nonetheless, it is important that you buy insurance along with the Home Loan. Once the loan starts, you cannot avail of insurance.

How Much Does Home Loan Insurance Cost?

For basic Home Loan Insurance, the total premium is usually between 3 to 5 percent of the entire home loan amount. However, different companies have different premium amounts for the tenure of the home loan. You can avail of Home Loan Insurance for a minimum of 5 years and a maximum of 30 years.

Let’s take an example to understand this better. You took a Home Loan of Rs 25 Lakhs for a period of 20 years. You have to pay a total of Rs. 1 Lakh for the entire tenure of the Home Loan and it can change as per the borrower’s age, tenure of the loan, the insurance company, and the employment type of the borrower.

Now, the borrower has two options:

Number one is to pay the premium to either the bank or the insurance company, separately. This is a financially good option given that the borrower can pay the entire amount in one go.

Number two is to pay the premium with the loan amount of Rs. 25 Lakh. Hence, the borrower has to pay EMIs for Rs. 26 Lakhs for 20 years. This makes the payment of the premium very easy and puts less pressure on the borrower because he/she has to pay the down payment, registration, stamp duty, interior decor, and other expenses.

Types Of Home Loan Protection Plans; Home Loan Insurance Plans

Home loan insurance plans or home loan protection plans are categorized into three different types of plans, they are as follows

1. Level Cover Plan

A level cover insurance plan ensures that the insured’s coverage stays constant throughout the loan term.

2. Hybrid Cover Plan

The first year of coverage is guaranteed with a hybrid cover home loan protection plan. As the balance amount decreases over time, it starts to decrease.

3. Reducing Cover Plan

With reducing cover insurance plans, both the coverage and the outstanding loan amount decline over time.

Features Of Home Loan Protection Plan; Home Loan Insurance

The following are the features of the home loan protection plans

1. Payment Of The Premium

When it comes to insurance against home loans, there is only one premium to pay and no need to pay numerous premiums. Payments of home loan insurance premiums, on the other hand, are made in line with the EMIs. As a result, the premium amount, like the principal loan amount, is paid in monthly installments.

2. Implications on Balance Transfers

The consequences of home loan insurance may change in the case of home loan balance transfers. Depending on the circumstances, the new lender may want a different home loan protection plan or may be satisfied with the old one. In addition, your home loan insurance may lapse as a result of the balance transfer, and the insurer may require you to start again with your insurance policies. As a result, in the event of a balance transfer, the home loan insurance policies should be restructured.

3. Provides Protection To Joint Borrowers Of The Home Loan

In the event of joint home loans, home loan insurance is not limited to a single person. Certainly, in the event of joint loans, all co-applicants are covered by insurance.

Benefits Of Home Loan Insurance

There are multiple benefits associated with home loan protection plans. The following are the benefits of home loan insurance:

1. Security Cover

The main benefit of a home loan insurance plan is that it offers security coverage for both the lender and the borrower. The lender is covered from losses while the borrower avoids the risk of a large responsibility in the event of financial difficulties.

2. Tax Benefits

The borrowers receive tax benefits from the income tax act that are the same as those received from a home loan when they pay a premium for home loan insurance. The premiums which are paid are eligible for tax deductions under Section 8o C of the income tax act and under Section 80 D of the income tax act.

3. Provides Flexibility And Convenience For Home Loan Borrowers

Premiums for home loan insurance are typically very costly. To make things easier for home loan applicants, most lenders combine the premium payment with the monthly EMIs. As a result, the premium, like the main amount borrowed, is paid in monthly income installments, making it more convenient for home loan borrowers.

4. Includes Add-On Benefits

When it comes to expanding the cover advantages, home loan insurance policies are very extensive. For example, home loan insurance covers a variety of situations such as critical illness, unexpected deaths, and unemployment. Suicides, on the other hand, are not covered by the home loan insurance plan. The borrowers can get additional benefits by selecting term insurance for home loans.

What Is The Difference Between Home Loan Insurance And Home Insurance? Home Loan Insurance Vs Home Insurance

Difference Between Home Loan Insurance And Home Insurance

A home loan insurance plan is very different from a home loan. The differentiation table below clearly explains the difference between home loan insurance and home insurance.

Home Loan Insurance Home Loan
A home loan insurance plan can only be purchased if a person has an existing home loan or is applying for a new home loan. As long as the borrower owns a home, regular home insurance can be purchased at any time.
The insurance on a home loan lasts until the loan amount is paid off. A home insurance policy expires when the selected tenure expires. Home insurance can be selected for a period of up to 30 years.
A home loan insurance plan assists the borrower in repaying his or her loan if he or she is unable to repay the loan amount. Thefts, fires, floods, burglaries, and other types of damage to the insured’s home are all covered by home insurance.
HDFC Life Home Loan Protection Plan, SBI Life Saral Shield, etc are some of the examples of home loan insurance. HDFC Ergo, Bajaj Allianz, SBI Long Term Home Insurance Policy, etc are some of the examples of home loans.

Additional and Optional Covers Under Home Loan Insurance

Normal Home Loan Insurance only covers the death of the borrower caused by rail/road/fire accidents, lightning strikes, acts of God, machinery handling accidents, and other uncontrollable situations. Accidental situations differ from company to company and suicide is not covered in basic Home Loan Insurance.

However, some insurance companies offer optional covers for an extra premium. According to these covers, the company offers financial assistance for conditions such as:

Terminal Illnesses: According to this option, the insurance company will honor the claim of the borrower if they are suffering from an incurable disease or a terminal illness that is likely to lead the borrower to death. The diseases included are AIDS, cancer, brain stroke, Alzheimer’s disease, and more.

Permanent Disability: Under this option, the insurance company will honor the claim of the insured person and they might not be able to continue their job. It covers both partial and total disability. These conditions may include, loss of one or both limbs, paralysis, loss of eyesight, and more. Again, such disabilities may differ from company to company.

Loss of Job: Under this option, the insurance company will honor the claim if the borrower lost their job due to layoffs or retrenchment by the employer. Voluntary retirement or self-resignation might not be covered under this option.

Closing Thoughts

Home loan insurance is a loan protection plan that ensures the repayment of the loan to the lender, in case of repayment failure by the borrower. Home loan insurance is beneficial for both the borrower and the lender.  One must always remember that home loan insurance is not the same as a home loan.  The borrower must also note that the home loan insurance plans provide tax benefits under the income tax act.

Home Loan Insurance FAQs

1. Is the purchase of home loan insurance mandatory ?

No, it is not mandatory to purchase a home loan. Some lenders, however, require borrowers to purchase a home loan to guarantee repayment of the home loan.

2. How does home loan insurance work ?

Home loan insurance acts as a safeguard for your home loan. Home loan insurance has a one-time premium that is paid based on the monthly EMIs. In the event of nonpayment of the loan, the insurer pays the loan amount on the insured’s behalf.

3. What is the benefit of home loan insurance ?

Both the lender and the borrower benefit from home loan insurance. While a borrower and his family are relieved of the burden of a home loan, the lender gets loan payments on schedule.

4. Where can a borrower purchase home loan insurance ?

The borrower can purchase a home loan insurance from a general insurance company or life insurance company. The policy which is offered by a general insurance company needs to be renewed by the borrower every year. The policy which is offered by a life insurance company is for a longer duration.

5. What are term life insurance and home loan insurance ?

A term life insurance provides life cover to your responsibilities and debts in the event of your death. A home loan insurance plan only covers the home loan if you are unable to pay the outstanding loan amount.

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