Home Loan Insurance: A Must-Have or a Waste of Money?

Buying a new home is considered an important milestone. Most people in India rely on getting a home loan to make their dream of home ownership come true. Today, as many lenders in India offer home loans at attractive interest rates, getting a loan is quite easy. However, since it is a long-term financial commitment, repaying the loan can be challenging as you must repay it within a predetermined fixed period. 

Even though you can repay the home loan in smaller installments known as EMI (equated monthly installments), if you cannot repay the amount due to unforeseen circumstances, such as job loss, accident or death, the repayment burden may fall onto your family members. In the worst-case scenario, you may lose your property. That is where home loan insurance plays an important role. 

 

What is a home loan insurance policy?

A home loan insurance policy, also commonly called a home loan protection plan, is a type of insurance policy specially designed for people who borrow a home loan. It ensures that you are able to repay the borrowed amount in case of unfortunate events and keeps your family members safe and protected from bearing the repayment burden. 

A home loan policy not only helps you repay the home loan amount in challenging situations but also covers physical damage to your property. 

 

How does home loan insurance work?

Home loan insurance works just as any other insurance policy. The insurance company offers compensation, i.e., agrees to settle your outstanding home loan amount directly with the lender when you raise a claim. Generally, the insurance company makes a lump sum payment. 

If you have availed the home loan with a co-applicant, i.e., taken a joint home loan, the insurance coverage covers both applicants. Consequently, in the event of the demise of one of the applicants, the insurance will safeguard the other from the repayment burden. 

 

Is home loan insurance necessary?

Now that you know what home loan insurance is, as a home loan borrower, you must also know whether it is mandatory for you to purchase this insurance cover or not. Nowadays, it is a common practice among financial institutions in India to offer home loan insurance along with home loans. 

However, as a borrower, you must know that neither the RBI (Reserve Bank of India) nor the IRDA (Insurance Regulatory and Development Authority) of India makes it mandatory for you to purchase home loan insurance with a home loan. However, you can voluntarily buy home insurance coverage from the insurer of your choice to get financial protection and not worry about losing your home in case of a mishap. 

While buying a home loan insurance is not a must-have, if you purchase it, you can be assured that it is not a waste of money. Home loan insurance offers several benefits, including:

• Protects the family

In the event of your sudden demise during the home loan tenure, your family has to repay the outstanding amount. And, if your family members cannot repay the loan, the lender has the legal right to sell off the property and recover their amount. 

That is where property insurance for home loans is beneficial. In such a situation, your family members can file a claim and get the protection amount. The insurer will then settle the outstanding loan amount with the lender. 

• Easy premium payments

Typically, most home loan insurance policies are single-premium policies. That means you have to pay the premium only once. Since the premium is high, the insurance companies give you the option of adding the premium to the loan amount, and the premium is deducted along with the EMI. 

• Additional protection

While the primary home loan insurance policy protects against unfortunate events like your untimely demise and repays the outstanding loan amount to the lender, you can get additional protection by purchasing add-ons or riders. That can help you broaden the scope of your policy's coverage, and you can get protection against critical illnesses like cancer, heart attack or an accident. 

These add-ons can also help you get coverage against your regular monthly EMI payments for up to six months if you face job loss or pay cuts. 

• Tax benefits

Another significant benefit of home loan insurance is that it allows you to enjoy tax benefits and reduce your overall tax liability for the year. The premium you pay for the home loan insurance is eligible for tax benefits under Section 80C of the Indian Income Tax Act. However, you must be aware that if you have added the premium to the loan amount and paid the premium through EMIs, you cannot avail of the tax benefit. 

 

Important things to consider while buying home loan insurance

It is quite evident that there are several benefits of a home loan insurance policy. However, just like buying any insurance coverage, you must be careful and consider the following things so that you get full value for your money. 

• You can buy home loan insurance from either a general or life insurance company. 
• Typically, the policies offered by general insurance companies must be renewed every year. They have an affordable premium. In contrast, the home loan insurance policies offered by life insurance companies provide coverage for a longer tenure and come with a higher premium. 
• If you want a home loan balance transfer, ensure that the home loan insurance is in line with the lender's policies, or you may have to restructure the loan to avoid policy lapse. 
• Don't confuse home insurance with home loan insurance. The former offers protection only against damages to your property and its contents. 

 

Conclusion

Home buying is a big and long-term investment. Therefore, be prepared for any uncertainties that may occur in the future. A home loan insurance policy can protect your home investment and your family members. 

Do your due diligence before buying the policy, and choose a plan that best suits your needs.