Home loan insurance
Home loan insurance is also known as Home Loan Protection Plan (HLPP). It is an insurance plan under which the insurer covers the outstanding home loan amount with the financial institution in case of the untimely demise of the borrower.
It is important to note that purchasing a home loan insurance is not mandatory. It solely depends on the choice of the borrower whether they want to opt for it or not.
Features and benefits of Home Loan Insurance
- Lump-sum amount benefit: A home loan insurance provides a lump-sum amount benefit that is transferred to the beneficiary by the home loan insurance provider, in the event of the death of the primary applicant. This amount can be used to pay off the outstanding home loan.
- Tax benefits: The borrower can avail of the tax benefits on the premium paid for the home loan insurance under section 80C of the Income Tax Act (ITA).
- Covers joint home loan borrowers: Home loan insurance is not restricted to any individual under joint home loans. In that case, the insurance coverage will apply to all the co-applicants.
- Extra cover: Home loan insurance policies also provide extra cover through rider policies for disease and disability by paying additional premium.
Types of Home Loan Insurance Policy
There are mainly three types of home loan insurance policy. They vary based on insurance coverage, as mentioned below:
- The Level Cover plan: In this type, the insurance coverage remains unchanged for the insured throughout the entire tenure of the home loan.
- The Hybrid Cover plan: In this type of plan, the coverage does not change for a certain period. But it starts decreasing as the outstanding loan balance decreases with the loan tenure.
- The Reducing Cover plan: In the reducing cover plan, the coverage and remaining loan amount, both reduce along with tenure.
The importance of the cover for lenders and borrowers
The main reason why a lender opts for housing loan insurance cover is to protect the loan from turning into bad debt. In the case of an unfortunate event like the demise of the borrower, the lender may lose a lot of money, especially if the borrower is the sole breadwinner of the family.
Home Loan insurance is important for borrowers as well. This is because it will ensure that in case of failure of loan repayment, the insurer will pay back the loan on his/her behalf. In that case, the home loan will not create a burden in times of financial crisis over the borrowers or their family members. Also, since the home loan is secured, the non-fulfilment of loan responsibilities gives the lender the right to acquire the borrower's house. However, with home loan insurance, the house remains entitled to the borrower even if he or she fails to repay.
Aspects to consider before buying a home loan insurance
There are mainly two types of home loan insurance covers that you can choose from. They are given below:
Term insurance – Term insurance protects all your liabilities and debts, including your home loan. The coverage remains the same for all assets insured in case of term insurance. Also, the nominee receives the sum assured in case of the death of the insured party. Nominees are liable to make the payments to the lender to settle the outstanding loan.
Separate home insurance– As the name suggests, this insurance for home loan protects only your outstanding home loan amount if you are unable to repay it. The size of the coverage you receive depends upon the outstanding home loan amount. As such, the sum insured reduces with every EMI repaid. In case the policy needs to be encashed by the borrower or the nominee, the insurance provider makes direct payments to the lender and settles the loan.
Things to remember before buying the home insurance policy
- You can buy a home loan insurance plan either from the general insurance company or a life insurance company. Policies purchased from general insurance providers need to be renewed on an annual basis and the premiums charged are significantly lower. However, the policies offered by life insurance companies are for longer terms.
- It is important to ask about the riders and add-on covers. It is beneficial to get a plan that covers situations like unemployment and disability, along with death. Also, check if the policy covers just natural demise or accidental demise too.
- Make sure that the loan tenure and insurance cover period must match. It is not advisable to opt for a shorter cover period and extend it later. It is because as you grow older, it will become difficult for you to get good coverage. Even if you get the same, it will be expensive.
- Compare various insurance plans in the market and pick the one that suits you the best.
Tips to make home loan insurance claim process easy
- If you do not want your loved ones to feel burdened in a pile of paperwork and other documentation, check below following steps to make the home loan insurance claim process easier for them:
- You should always be honest while purchasing the home loan policy. If you are suffering from any ailments or severe illness, then you need to declare about it honestly.
- Always update your beneficiary details regularly. Your home loan insurance claim may get rejected you have not updated your beneficiary details.
- Have a clear understanding of your home loan insurance plan. Be aware of what it includes and what are its exclusions.
- You should always tell about the home loan insurance plan to the beneficiaries you have added. If you will not tell them, then they will not be able to claim in your absence.
- Keep all the required documents in one place. If the documents are not in order, you will not be able to file a claim.
- You should always pay your policy premiums to keep it updated.