While deciding to buy a home, most of you would opt for a home loan. You risk profile increases greatly when you take a home loan, as it is one of the longest debts in your life, requiring a long term commitment. Let’s see how home loan insurance reduces this risk.
Why is home loan insurance required?
Your home loan liability should be paid off whether you are alive or not. The loan will need to be repaid by your family members if you die during the term of the loan. If the loan is not repaid, the lender can take possession of your home. Home loan insurance will eliminate your family’s burden to repay the loan as the insurance company will pay the outstanding loan amount.
Eligibility criteria-
Every insurance company has different eligibility criteria. Most companies specify the minimum entry age of the borrower as 18 years and the maximum entry age as 50 years (some banks extend this to 60 years). The maximum age of the borrower at the maturity of the policy is also sometimes stipulated. Some banks also cap the maximum sum assured and have minimum and maximum policy term requirements. Kotak has fixed the maximum term as 30 years while HDFC Life has fixed the maximum sum assured as Rs. 30 lakhs.
Working-
Home loan insurance is similar to a term life insurance, except that in the case of the former, the sum assured is equal to the outstanding home loan amount and it is not a fixed sum. So, in effect, the insurance cover you get under a home loan insurance reduces when you pay your EMIs.
Example: Raj has taken a home loan of Rs. 20 lakhs and repays Rs. 4 lakhs of the principal over the next 5 years. After 5 years, Raj expires, leaving Rs. 16 lakhs of outstanding loan. If he has taken home loan insurance, the insurance company will pay Rs. 16 lakhs to the lender.
In some cases (for example, the Home Safe Plus scheme of ICICI Bank), insurance cover is available on a flat basis instead of a reducing basis. In this case, the fixed amount is paid to the beneficiary.
Cost-
Premium towards home loan insurance depends on the age of the borrower, amount and tenure of the home loan and the borrower’s medical record. You can either make a single premium payment (generally insisted) or pay the premium periodically.
Claim-
The insurance is taken in the home loan borrower’s name, and in case of death of the borrower, the family members should file for the claim. The claim amount is paid directly to the lender or in some cases, to the family member. If the borrower is alive beyond the term of the policy, he does not get back the premium paid.
What you should watch out for-
In most cases, your home loan lender will have a tie-up with an insurance company, from where you will be asked to purchase the insurance. In this case, the lender pays the premium upfront, bundling this with the loan and including it in the EMI amount. This will work against you, as you will be paying interest on the premium amount as well.
Example: Suppose your home loan is for Rs. 20 lakhs and insurance premium is for Rs. 2 lakhs. The premium is paid by the lender to the insurance company. Your new loan amount will now be Rs. 22 lakhs, which will be spread out as EMIs over the tenure, resulting in you paying interest on the premium amount also.
Home loan insurance can be taken from any company at any time. You can also take a term cover for the value of your home loan. Although it is not compulsory to have an insurance policy to cover your home loan, it is highly recommended to have one to reduce your family’s financial burden.
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Why is home loan insurance required?
Your home loan liability should be paid off whether you are alive or not. The loan will need to be repaid by your family members if you die during the term of the loan. If the loan is not repaid, the lender can take possession of your home. Home loan insurance will eliminate your family’s burden to repay the loan as the insurance company will pay the outstanding loan amount.
Eligibility criteria-
Every insurance company has different eligibility criteria. Most companies specify the minimum entry age of the borrower as 18 years and the maximum entry age as 50 years (some banks extend this to 60 years). The maximum age of the borrower at the maturity of the policy is also sometimes stipulated. Some banks also cap the maximum sum assured and have minimum and maximum policy term requirements. Kotak has fixed the maximum term as 30 years while HDFC Life has fixed the maximum sum assured as Rs. 30 lakhs.
Working-
Home loan insurance is similar to a term life insurance, except that in the case of the former, the sum assured is equal to the outstanding home loan amount and it is not a fixed sum. So, in effect, the insurance cover you get under a home loan insurance reduces when you pay your EMIs.
Example: Raj has taken a home loan of Rs. 20 lakhs and repays Rs. 4 lakhs of the principal over the next 5 years. After 5 years, Raj expires, leaving Rs. 16 lakhs of outstanding loan. If he has taken home loan insurance, the insurance company will pay Rs. 16 lakhs to the lender.
In some cases (for example, the Home Safe Plus scheme of ICICI Bank), insurance cover is available on a flat basis instead of a reducing basis. In this case, the fixed amount is paid to the beneficiary.
Cost-
Premium towards home loan insurance depends on the age of the borrower, amount and tenure of the home loan and the borrower’s medical record. You can either make a single premium payment (generally insisted) or pay the premium periodically.
Claim-
The insurance is taken in the home loan borrower’s name, and in case of death of the borrower, the family members should file for the claim. The claim amount is paid directly to the lender or in some cases, to the family member. If the borrower is alive beyond the term of the policy, he does not get back the premium paid.
What you should watch out for-
In most cases, your home loan lender will have a tie-up with an insurance company, from where you will be asked to purchase the insurance. In this case, the lender pays the premium upfront, bundling this with the loan and including it in the EMI amount. This will work against you, as you will be paying interest on the premium amount as well.
Example: Suppose your home loan is for Rs. 20 lakhs and insurance premium is for Rs. 2 lakhs. The premium is paid by the lender to the insurance company. Your new loan amount will now be Rs. 22 lakhs, which will be spread out as EMIs over the tenure, resulting in you paying interest on the premium amount also.
Home loan insurance can be taken from any company at any time. You can also take a term cover for the value of your home loan. Although it is not compulsory to have an insurance policy to cover your home loan, it is highly recommended to have one to reduce your family’s financial burden.
Team Getting You Rich
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