- Do bank executives tell you that it is mandatory to take insurance for a home loan?
- If so, then let's be told that it is not mandatory
- However. having it will mean the insurance company will pay the outstanding dues if you die or get permanently disabled due to an accident, during the policy term.
Let’s answer it straightaway – It is not mandatory to take insurance for a home loan. If a bank executive is forcing you to accept an insurance plan for your home loan, you can complain about it to the customer care executive or senior bank officials and get the matter sorted out. If you don’t get any positive response from them, you can escalate the matter to the banking ombudsman, a senior official appointed by the banking regulator i.e. The Reserve Bank of India (RBI) to redress customer complaints.
You can write it down on a paper, send an email or fill the complaint form on the official website of RBI. Once the complaint is lodged here, the concerned executive will have to answer within the prescribed number of days – such are the banking rules in India.
But, if you want a cover for your home loan, you should know about it and several other aspects concerning the same.
What is Home Loan Insurance Plan?
The home loan insurance plan, which is often termed as home loan protection plan (HLPP), means the insurance company pays the outstanding loan balance should the borrower die or find it hard to repay in the event of permanent disability resulting from an accident. As is the case with conventional term insurance plans, you have to pay premiums to get the cover for a home loan.
How Much Premium Will You Pay to Cover the Home Loan?
If the lender offers you an insurance cover for a home loan, it means the Equated Monthly Installment (EMI) will be inclusive of the premium amount. You could also find lenders offering you a single premium plan. In that case, the premium amount will be added to the loan amount.
Now, will there be a difference in the EMI when you choose an insurance plan with recurrent premiums to that of a single premium plan? If so, then how much? Let’s figure it out now.
Example – Ravi and Shweta applied for a home loan worth ₹40 lakh for 15 years at 8.50% interest rate each. Both got the loan cover with an annual premium of ₹4,000 each. The EMI without premium comes out to be ₹39,390. But with premium, the EMI will be ₹39,723. Most likely, the annual premium of ₹4,000 will be divided by 12 to give a sum of ₹333 (approx.). The amount will be added to the monthly installment amount. This will add up to ₹39,723 that you can see above.
Compared to a single premium plan of say ₹35,000 giving you a cover for 15 years, the EMI will be ₹39,734, slightly higher than what’s the case with a recurrent premium plan. Here, the EMI is calculated on ₹40 lakh (home loan amount) + ₹35,000 (premium amount).
Short-term or Long-term Insurance Plan – Which is Better?
As the home loan usually runs for 20-30 years, it doesn’t make sense to opt for a shorter period just because the premium will be lesser. In fact, the term plan should exist for the time the loan is there.
What Should be the Cover Amount?
Ideally, you should go for a cover amount that not only equals the loan amount but also includes the amount your family will require, if you die during the policy term. Don’t take the insurance plan with a lower cover just because it can have affordable premiums. Think of the time when your family members have to pay the tall outstanding balance should you die with a lot of years left for the loan to be over. Plus, it’s not only the principal amount you pay. You also pay interest on the loan. So, consider that as well. How can you know the interest you will pay to the lender? Simple, use the home loan EMI calculator online and find it out. Just enter the loan amount, interest rate and tenure to figure out the estimated interest payments.
What If You Already Have an Insurance Plan?
In that case, you must get a top-up cover equaling the loan amount. For example, if you have a life cover of say ₹50 lakh and are servicing a loan worth ₹30 lakh, you should then have a top-up cover of ₹30 lakh. Don’t utilize the existing cover amount of ₹50 lakh towards home loan insurance as that can lead you to compromise with your family needs.
Will You Get Tax Benefits or Not as It’s a Home Loan Insurance Plan & Not a Standalone Home Loan?
Tax benefits will be there only on principal and interest portions of a loan and not the insurance premiums. Whereas, a standalone term insurance plan can provide tax breaks on the premiums you pay.
At the end, don’t think that a home loan insurance plan and a home insurance plan are the same. They are different from each other. While the loan insurance plan secures the credit you avail from a lending institution, a home insurance plan gives cover for the financial losses caused due to damages to your home from environmental hazards such as fire, thunderstorms, hailstorms, theft, etc. The cover also includes the cost incurred on replacing the damaged parts, garages, outbuildings, wall fixtures, etc.