Why is Housing Loan Insurance Important in 2022?
A housing loan insurance policy covers the loan amount in case of failures of home loan repayment by you. Thus it is beneficial for both the lender and the borrower.
Importance of Housing Loan Insurance for Lenders – Housing loan insurance policy is important for lenders. Banks and NBFCs earn a lot through home loan interest rates and they don’t want to lose their money when you are unable to pay. A failure on your part can disrupt the lender’s regular sources of income. Thus, home loan insurance is ideal for lenders, because in any case, banks receive the expected funds.
Importance of Home Housing Insurance for Borrowers – Housing loan insurance is important for you as it ensures that in case of default on the loan, the insurer will repay the loan on your behalf. In that case, home loan in your absence will not burden your family members during financial crisis. Note that, a home loan is a secured loan that gives the lender the right to get the mortgaged property in case of inability to repay the loan. However, with home loan insurance, you will not lose ownership of the home even if you fail to repay it.
Types of Insurance Cover for Home Loans
There are three types of Housing loan insurance cover, level cover plan, hybrid cover plan and reducing cover plan. These three types differ on the basis of insurance coverage, as explained below:
- Level Cover Plan: This is a basic insurance plan in which the premium paid for Housing loan insurance and coverage remains the same throughout the tenure.
- Hybrid Cover Plan: As per this Housing loan insurance plan, the coverage is full for the first year and then the balance reduces with the tenure.
- The Reducing Cover Plan: In the case of reducing cover plan, the loan balance and coverage reduces over time, the coverage is reduced when the tenure is about to end.
What are the main features of Housing loan insurance plans?
It is advisable to know the features of Housing loan insurance plans before opting for them. These are listed below:
- One-time payment: Only one-time premium amount is to be paid and there are no multiple premium requirements on home loan insurance. However, the home loan insurance premium is paid as per EMI. Thus, the premium amount is divided into monthly payments just like the original loan amount.
- Implications on Balance Transfer: In case of home loan balance transfer, the implications of home loan insurance may vary. Sometimes the new lender may insist on a different home loan security plan or be flexible with the previous one. Also, home loan insurance may end with balance transfer, and the insurer may ask you to resume insurance plans. Thus, in case of balance transfer, one should ensure restructuring of home loan insurance plans.
- Covers joint home loan borrowers: Home loan insurance is not limited to a particular person in case of joint home loan. In fact, in case of joint loan, the insurance coverage is applicable to all the co-applicants.
What are the main benefits of Home Loan Protection Plan?
There are multiple benefits associated with home loan security plans. This includes:
- Security Cover: The main benefit associated with home loan insurance cover is that it provides security coverage to both the lender and the borrower. When the lender is protected from loss, you are spared a huge liability in times of financial distress.
- Tax Benefits: The premium paid on home loan insurance provides borrowers with the same tax benefits as a home loan. However, you can get tax benefits under Section 80 (c) and 80 (d) of the IT Act.
- Convenience and flexibility: Home loan insurance premiums are generally charged at a higher rate. However, to make it easier for you, lenders often combine the premium amount with the regular EMI. Thus, like the principal amount borrowed, the premium is also paid in installments, which makes it convenient for home loan borrowers.
- Add-ons included: Housing loan insurance policies are very inclusive when it comes to extending the cover benefits. For example, home loan insurance provides coverage for various schemes that include illness, sudden death or
unemployment. However, suicide is not covered under home loan insurance schemes. Additional benefits can be availed by opting for term insurance for home loans.
Why is Housing loan insurance important to lenders?
Lenders don’t like their loans turning into bad debts. Obviously, they will want to protect their money. To avoid a home loan turning into a very bad debt, lenders require Housing loan insurance. In the event of the borrower’s death, the lender stands to lose a lot of money, especially when the borrower was the sole earning member of the family.
Why is Housing loan insurance important for borrowers?
As we already know, a Housing loan insurance plan covers the outstanding home loan amount in a situation where the borrower fails to repay his loan. Such situation may arise due to job instability or death of the borrower. You can opt for a regular plan or opt for extra features and riders that come with more enhanced coverage. Home loan insurance is important for borrowers as it ensures that borrowers’ dependents do not become homeless in its absence or in an emergency.
Aspects to Consider Before Choosing Housing Loan Insurance:
Below are the options you can choose to take Housing loan insurance:
- Term Insurance – It is purchased so that all your liabilities and debts are taken care of.
- Separate Home Insurance – This insurance scheme takes care of your home loan balance only in case you are unable to repay it.
Most Housing loan insurance plans offer reduced coverage with them. The size of the coverage is linked to the outstanding home loan. Thus, when a person repays the loan amount, the sum assured gets reduced. However, in case of term insurance, the coverage remains the same. In case of term plan, the sum assured is received by the nominee who can pay the lender or bank to settle the loan. In case of Housing loan insurance plan, the insurer directly pays the home loan outstanding to the lender to settle the loan.
Home loan insurance can be purchased from either a general insurance company or a life insurance company. What general insurance companies offer needs to be renewed annually. The policies offered by life insurance companies are for long term.
It is extremely important that you ask about riders and add-on cover. It is beneficial to have a plan that covers conditions like unemployment and disability along with death. Also check whether the policy covers only natural death or accidental death as well.
The loan tenure and insurance cover tenure should match. It is not advisable to opt for a short cover period thinking that you will extend it later. There is a very strong chance that you may forget to stretch in the long run. Also, as you get older, it becomes harder for you to get good coverage. If you get one, it will be very expensive.
When you plan to buy a particular security plan, make sure that it matches all your requirements. Compare various products in the market and choose the one that suits you best. Before you bundle your EMI payments with premium payments, sort out your expenses.
Features of Home Loan Protection Plan:
Payment of premium – Most home loan protection plans are all single premium policies. This means that you have to pay for the premium only once. Since the premium amount is quite high, lenders often add the premium amount to the loan amount. The borrower pays the premium in equal monthly installments. For example, if you spend Rs. 30 lakhs loan amount and the home loan protection you opt for costs Rs. 1.5 lakh, then you have to pay Rs. 31.5 lakhs calculated as your EMI will have to be paid.
Life Cover – Most home loan protection plans offer life cover equivalent to the home loan outstanding. The cover ends as soon as the loan amount is cleared.
Riders or Add-ons – Some insurance providers offering home loan insurance plans offer optional rider plans to enhance their cover benefits. The riders that can be availed of Home Loan Protection Plans are mentioned below:
- A deadly disease
- accidental death
- Jobless for three to six months of EMI payments
The cost of the policy with these additional features is more expensive than other regular home loan insurance plans.
Benefits of Home Loan Protection Plan?
- In case of unfortunate default of the borrower, the insurer pays the outstanding loan amount to the lender or bank.
- Tax benefits can be availed under Section 80C of the Income Tax Act.
- A borrower can avail add-on coverage or riders to enhance your home insurance plan. Disability rider and critical illness rider ensure that the outstanding loan amount is covered not only in case of unfortunate death, but also during disability or critical illness of the borrower.
How are home loan insurance plans different from other insurance plans?
Regular insurance plans can be purchased at any time. However, home loan protection plans cannot be purchased at any time. It can be purchased only when you have an existing housing loan or apply for a new home loan. Also, home loan insurance plans offer reduced cover that covers only the outstanding amount of the loan. Unlike other regular insurance policies, the cover is available only till the end of the loan tenure.
Is it mandatory to buy a home loan insurance plan?
Buying a home loan protection plan is not mandatory. Whether you want to buy it or not is entirely up to you. However, it is only advisable that you secure your future through a home loan insurance plan.
Difference between Home Loan Insurance and Home Insurance:
Home loan insurance and home insurance are completely different. However, they sound similar and people often get confused between the two terms.
Home Insurance Plans:
A home insurance plan, also known as homeowner’s insurance, provides coverage to your home and its contents against perils such as fire, explosion, lightning, etc. It also provides protection against theft or burglary.
Home Loan Insurance Plans:
Home loan insurance plans or home loan protection plans clear your home loan debt if you are unable to repay the loan due to death, disability or critical illness.