Given the uncertain nature of life, a majority of the people tend to secure their as well as their loved ones’ future with loan insurance policies. Consequently, home loan insurance, also known as mortgage insurance, has gained popularity in today’s world due to the skyrocketing property prices. In order to understand its benefits, it is important for us to go over the concept first. Read on to know more.
A home loan insurance plan basically comforts the lending institution. It does so by telling them that the Home Loan amount which has been borrowed from them by a particular individual will be repaid to them in full. As per the implied assurance, the loan insurance company will repay the home loan debt of the borrower irrespective of the route the borrower’s life takes.
Some of the home loan insurance plans which are available in the market offer cover for the applicant, the home itself, as well as its contents such as furniture and amenities and other valuables. Such a guarantee is provided to the lender on behalf of the borrower, provided the latter continues to pay the premium to a housing loan insurance company. The premiums which are paid towards the policy in question are tax deductible.
Such policies are important to lending institutions for the simple fact that they do not wish to see their loan account turn into a bad debt. Hence, one can say that it will be only natural for them to seek some kind of protection for their money as bad debts affect lenders in more ways than one. Bad debts can occur as a result of tragic events such as an untimely demise of the borrower or job loss, and recovering them may prove to be especially tricky if the borrower is the only earning member of the family. Here’s where home loan insurance comes into the picture.
As we know already, home loan insurance policies cover the remainder of the home loan amount on behalf of the insured borrower provided he or she is unable to pay them for some reason. A situation like that may arise due to the unstable nature of the borrower’s employment status or his or her untimely demise. In order to protect his or her family from the burden of home loan repayment, or worse, homelessness, the borrower can choose a regular home insurance plan or opt for one that comes with a host of additional features.
Features of Home Loan Insurance Plan are mentioned below:
One-Time Premium Payment: A majority of the home loan insurance plans are all single premium policies. This means that you must make the premium payment just once, at the time of taking the loan. However, as this premium amount is generally high, lenders offer to add the same to the home loan EMI. Thus, the borrower pays the premium amount as part of the Home Loan EMI over the course of the repayment tenure to spread the financial burden.
Coverage Equivalent to a Life Cover: Most home loan insurance policies offer a coverage as high as one would receive under a life insurance cover. But, the cover comes to an end as soon as the loan amount is cleared.
Riders or Add-ons: Several providers that offer insurance on home loans offer a host of non-compulsory riders or add-ons that the insured can choose from if they want to increase the scope of the plan. The riders which can be availed along with a housing loan protection plans are as follows:
Joblessness since the past three to six months
It must be noted that if an individual ends up taking on any of the aforementioned riders, their premium obligation towards the housing loan insurance policy will increase. If the borrower has chosen to club this premium amount with the home loan EMI, then the latter will increase. Hence, one must account for the same while calculating their Home Loan EMI.
Benefits of a Home Loan Protection Insurance are mentioned below:
If, for instance, the borrower passes away unexpectedly, the insurer pays the outstanding loan amount in full to the lending institution.
Tax benefits under Section 80C of the Income Tax Act, 1961, can be availed as well. The premium payer can get the premium amount deducted from their overall taxable income under this section.
The borrower can additionally make use of the add-on covers or riders to improve the home insurance plan’s coverage. These riders also cover the individual if he/she is diagnosed with a critical or terminal illness.
Below mentioned three kinds of Home Loan Insurance policy exist:
1. Level Cover Plan: A level cover plan implies that the insurance coverage stays constant throughout the repayment tenure.
2. Hybrid Cover Plan: The holder of a Hybrid cover policy will be insured for the full home loan amount in the first year. However, as the outstanding balance amount reduces, so will the insurance coverage.
3. Reducing cover plan: In such plans, the coverage never remains the same and reduces as the balance amount goes down.
Home Insurance: A home insurance, also known as homeowner’s insurance, offers protection to the house against incidents such as accidental fires, explosions, lightning, and burglary, among others.
Home Loan Insurance: Home Loan insurance plans essentially guarantee the lender that they will receive the outstanding home loan amount in case something happens to the borrower.
It can be availed from either a life insurance company or a general insurance provider.
It would be best if the individual compares multiple plans from several insurance providers before choosing one.
If the policy is purchased from a general insurance provider, it must be renewed annually, which should not be an issue as premium amounts charged in such cases are generally lower.
You can also purchase the policy either by visiting the office of the policy provider or online.
One can claim the tax benefits that come with such insurance policies under Section 80C of the Income Tax Act, 1961. As per this section, the premium amount that is paid to service the home loan insurance can be deducted from the overall taxable income. However, it may not be possible if the premium money was borrowed as a loan as well.
Regular insurance plans can be bought at any time. However, one cannot buy a home loan insurance policy whenever they want to. It can only be purchased when an individual has an existing housing loan or is applying for one. Additionally, housing loan insurance schemes are reducing covers which include the outstanding loan amount only. Hence, such covers are only valid till the end of the loan repayment tenor.
Although highly recommended, a home loan insurance plan is not mandatory at all. It is, in fact, completely up to the borrower if they wish to get one or not.