What is Home Loan Insurance?

Home Loan Insurance

Home loan insurance is even addressed by the term mortgage insurance, which is a massively popular term in the present-day world owing to the rising prices of housing. As life is uncertain and prone to unpredictable events, most individuals usually secure their future as well as the future of their near and dear ones by opting for home loan insurance. To know how they can be of great help to us and benefit us, we must first know what home loan insurance actually is.

What is Home Loan Insurance?

A home loan insurance scheme is a plan under which the plan insurer settles the home loan outstanding amount with the concerned HFCs or banks in case of any unforeseen event with the home loan borrower. Few of the comprehensive plans related to home loan insurance schemes may offer cover for the home, applicant and all their contents. The premium that is meant to be paid for the home loan insurance scheme is applicable to avail tax benefits.

Why is Home Loan Insurance Important?

Importance of home loan insurance for the lenders:

Home loan lenders do not want their offered home loans to convert into bad debt. They generally look forward to protecting the money. To avoid the home loan converting into bad debt, most lenders want their borrowers to take up home loan insurance. On the occasion of the borrower's unexpected demise, lenders may end up losing a lot, particularly if the home loan borrower was the sole breadwinner of the family.

Importance of home loan insurance for the home loan borrowers:

As we are already aware, the home loan insurance scheme covers home loan outstanding amounts in the case when borrowers are unable to repay their debts. Such cases might come up if the borrower faces job instability or faces demise. The borrowers might select a regular plan or choose the one with additional features clubbed with riders for more enhanced insurance coverage. Home loan insurance is necessary for home loan borrowers as it makes sure that their dependents do not turn homeless in their absence or in case of any crisis situation.

Crucial aspects to be factored in before choosing a home loan insurance scheme:

Major ways that one can select for insuring their home loan are listed below:

• Term insurance: This is bought so that all of your debts and liabilities can be taken care of in case of your absence.
• Separate home loan insurance: It is an insurance plan that just takes care of your outstanding home loan amount at the time when you are not able to repay it off.

Most home loan insurance plans provide reducing cover. The size of such covers is linked to home loans outstanding. Thus, the insured sum goes down on repayment of the home loan EMI. However, in the case of term insurance, the cover remains the same. In the situation of a term policy, the assured sum is received by the nominee who requires making the repayment to the bank/HFC for settling the home loan.

A home loan insurance plan can be bought either from a life insurance company or a general insurance company. Those plans that are provided by general insurance companies require being renewed annually. Policies issued by life insurance companies come with longer terms. Issuers can even ask for add-on covers and riders. Adding in them can be helpful in situations like disability and unemployment alongside death. Also, note to check the home loan insurance plan covers both accidental death and natural death.

The insurance cover period and loan repayment tenure period should match. Thus, it is not recommended to choose a shorter cover period with the thought process that you will increase it later on. They hold a strong chance of you missing out on the extension of it. Also, as you become older, it gets tough for you to avail substantial coverage. Even if you avail of it, it may be very costly.

Thus, when you decide to buy a specific protection plan, make sure that it is a perfect match with all your home loan repayment tenure. Strike a comparison of different products prevalent in the market & then pick up the one that matches your needs. Before bundling up your home loan EMI repayments along with the premium payments, ensure to sort out your expenditures.

Benefits of Home Loan Insurance

• In the untimely event of an unfortunate death of the home loan borrower, the insurer can repay the outstanding home loan amount to the bank or HFC.
• As per Section 80C, tax benefits can be availed
• Borrowers can take up add-on covers and even riders for enhancing their home loan insurance scheme. Adding in add on or rider options makes sure that the outstanding home loan amount is not just covered in the situation of witnessing an unfortunate death but also in case of critical illness or disability.

Types of Home Loan Insurance

There are 3 kinds of home loan insurance schemes that involve a level plan, hybrid cover plan and reducing plan, which is discussed below:

• Level plan: Throughout the loan repayment tenure, the cover stays the same for the insured.
• Hybrid plan: Cover stays full in the course of the first year. It begins lowering as the home loan balance amount lowers with the tenure.
• Reducing plan: Both the outstanding loan and cover lowers with loan tenure.

It must be evident from above that the borrowers can take up a home loan insurance scheme if they have not taken up term insurance. On the grounds of features, home loan insurance and term insurance share almost the same benefits, with home loan insurance being restricted just towards meeting up the home loan debts in case of any uncertainty, while term insurance serves as a replacement income to meet all the liabilities and loan obligations of the insurer by their dependents. Borrowers having home loans must definitely think of taking up home loan insurance to secure their family against any unfortunate happening. However, note that taking up home loan insurance is not at all mandatory. But borrowers of the home loan must still consider this after or while taking a home loan.

Difference between Home Loan Insurance & Home Insurance

Individuals usually get confused between home loan insurance and home insurance. Note that these 2 terms are completely different & serve different purposes.

As per the home insurance, the insurance assists at covering your home against major risks like:

• Damage from any natural calamity such as storm, earthquake, fire, flood etc.
• Damage of the property or home owing to theft.

It means home insurance serves as a replacement cost of a home in case of any damage. However, home loan insurance plans cover the home loan that you take for purchasing the home or property. The plan covers just the home loan outstanding amount from the purchase date. While most lenders have made the purchase of home insurance mandatory, home loan insurance plans are not compulsory and depend on the sole discretion of the home loan applicant or loan borrower.

FAQs

✅Is purchasing a home loan insurance plan mandatory?

It is certainly not compulsory to purchase a home loan insurance plan. However, few of the lenders may insist their borrowers purchase one to ensure timely repayments of their home loan EMIs even in cases when the borrower witnesses any uncertainty. However, choosing a home loan insurance plan is completely an individual choice and is advantageous for both the borrower and lender.

✅How much does home loan insurance cost?

Home loan insurance plans vary from lender to lender or from one insurance company to another. Also, the insurance amount is based on the borrower’s home loan amount. Moreover, it further depends on the home loan insurance the borrower has opted for.

✅How does the home loan insurance function?

Home loan insurance plan functions as a home loan protection plan. The premium for home loan insurance is charged one time, which is distributed based on the home loan EMIs. In a situation of repayment failure, the insurer repays the loan amount on behalf of the insured.

✅What is meant by the home loan protection scheme?

A home loan protection scheme refers to the insurance scheme, as per which the insurer carries out the loan responsibilities when the borrower fails to repay them owing to unforeseen reasons.

✅Is property insurance for home loans mandatory for the home loan borrowers as per the RBI?

No, as per RBI, it is not mandatory for home loan borrowers to opt for property insurance for a home loan plan. However, lenders might advise their borrowers to purchase property insurance for a home loan, but it is completely dependent upon the borrower's choice to do so.

✅Name some popular home loan insurance schemes.

Insurers cater to various home loan insurance schemes, including HDFC home loan insurance, SBI home loan insurance etc. A few of them are SBI Life Rinn Raksha, SBI Life Saral Shield, SBI Life Smart Shield, HDFC life home loan protection scheme etc.