In case of unforeseen situations, there may come a time when you may find it difficult to repay your loans. Loan insurance is a great way to ensure that you do not miss out on repaying your loan even if there is a financial crunch.
Home loan insurance is one such policy that saves you from defaulting on your home loan repayment. These plans have become popular for many reasons, the main among them being the protection they offer.
To learn more about housing loan insurance, its features, benefits, reasons to buy, and more, read on.
Home loan insurance or a home loan protection plan (HLPP) protects buyers in unfortunate or unforeseen situations where they fail to repay their loan.
For instance, if a person avails of a home loan with a tenure of 15 years but is unable to repay it after 10 years. This could be due to loss of a job due to a disability that resulted from an accident.
In such a case, the insurer will repay the outstanding balance of the loan if that person has opted for a housing loan insurance plan. However, it is crucial to note that insurance is only available if you pay the premium.
As mentioned above, home loan insurance plans secure your liabilities as a home loan borrower. However, in the current economic situation, there are many reasons why you may not be able to repay the loan.
Generally, when you default on a home loan, the lender can seize your home and try to recover the outstanding amount from your family. In any case, it can jeopardise you and your family’s future.
However, you can avoid this by choosing home loan protection insurance. You can even avail add-on features that make your insurance more comprehensive. As such, it becomes essential to invest in such a plan.
Here are a few essential features of a home loan insurance plan:
Coverage Equivalent to Outstanding Liability: A home loan insurance cover is equal to the outstanding home loan amount. This ensures the loan is repaid, and you/your family need not pay an additional amount when using the insurance cover.
No matter what the home loan interest rate is, this insurance covers the entire balance due.
Flexible Premium Payment: A majority of home loan insurance plans have a single premium payment. This means you must pay just a single amount to activate your insurance policy. However, this amount can be high when your loan amount is high.
In this case, you can pay the premium in EMIs along with your home loan EMIs. This helps ensure the premium payment does not strain your finances.
Add-ons: Several home loan insurance policy providers offer a host of non-compulsory riders/ add-ons that you can choose to make the coverage comprehensive. The add-ons you can avail along with housing loan protection plans include the following:
Joblessness for the past three to six months
It is crucial to remember that choosing any of the above riders/add-on covers can increase your premium payment.
If you choose to pay the premium with the home loan EMI, then the latter will increase. Hence, you must account for the same when calculating your home loan EMI.
If you decide to opt for housing loan insurance, the following are the benefits that you can enjoy:
If you are unable to repay the loan due to critical illness or disability, the insurer takes care of your loan repayment.
Say the borrower is the sole earning member of the family and meets an untimely demise. In this case it becomes impossible for the surviving family members to repay the loan.
In such situations, mortgage insurance comes handy as family members can claim the protection amount to pay off the loan.
You can also avail of tax deductions on the amount you pay as the premium for your home loan insurance plan under Section 80C.
If you are unable to pay the premium, many policies allow their holders to adjust their premium payment with their Equated Monthly Instalment (EMI).
Listed below are three types of home loan insurance policies you can choose from:
This is a basic insurance plan wherein the coverage stays constant throughout the tenure. Given this, the premium amount remains unchanged unless you buy add-on covers.
Here, the cover amount will stay the same as your home loan amount in the first year. Post that, it will reduce with your outstanding home loan amount.
As a result, the premium amount may also reduce. Since the coverage stays the same initially and then decreases, it is known as a hybrid cover plan.
In this home loan protection plan, the coverage changes throughout your tenure. The reduction is aligned with your home loan amount. Hence, as your outstanding loan amount reduces, the cover also decreases.
Remember that the premium you need to pay will also reduce with your home loan amount. It is important to note that the coverage in this plan type is never the same and decreases from the start, unlike the two other insurance plans.
Although home insurance and home loan insurance may sound the same, there are numerous differences you need to know. Here is a significant difference between these two insurance policies.
Home Loan Insurance: You can avail home loan insurance plans if you have an existing loan or plan to get a home loan. This plan guarantees the lender will receive the outstanding home loan amount if something unfortunate happens to you.
Home Insurance: Home insurance, also known as homeowner’s insurance, is a plan you can buy whenever you want. It offers protection against incidents, such as accidental fires, explosions, lightning, and burglary, among others.
Before delving into which is better between term insurance and home loan insurance, understanding the features of both insurance policies is crucial. So, here is a breakdown of essential features for both insurance policies:
A home loan insurance policy will specifically cover your home loan repayment. On the other hand, term insurance can cover a variety of your and your family’s requirements.
In term insurance policies, you can choose the amount based on your needs. On the other hand, a home loan protection plan will cover only your outstanding home loan amount.
A home loan insurance policy is for the specific purpose of covering your home loan, and the tenure is the same as your loan tenure. However, you have the flexibility to choose the tenure in a term insurance policy.
In home loan insurance plans, the beneficiary is the lender since the insurance provider will repay the loan to the lender on your behalf. For term insurance, you can choose a nominee as per your will.
You must assess your needs to decide which insurance policy is ideal for you. Since both home loan insurance and term insurance have a massive difference in coverage, beneficiary, and other features, understanding your requirements can help you make the right decision.
To assess your needs, you must first determine why insurance is necessary. If the main goal is to protect your family from home loan repayment in your absence, mortgage insurance may be the right choice.
One of the most significant and beneficial reasons for a home loan insurance policy is its coverage. In case of unexpected incidents, it will ensure your family is secure by taking care of your outstanding home loan liabilities.
Apart from the above, here are five more reasons why you need to get mortgage insurance:
When you get a home loan insurance policy, your premium is eligible for tax benefits under Section 80C of the Income Tax Act. This helps keep your liability secured and save on taxes.
Like any insurance policy, mortgage insurance also has add-on covers, allowing you to enjoy additional features and benefits. This enables you to get the most from your policy.
Generally, insurance policies have a single payment for premiums. This means that you pay your premium once, and you are done. The insurance provider will then offer coverage for the said tenure.
However, you can pay the premium in EMIs with your home loan insurance plan. This reduces your financial burden while keeping your liability secured. Do note that the premium may not be eligible for tax benefits in this case.
If you have a joint home loan, you need not worry about taking separate insurance policies. Mortgage insurance providers often offer a single policy for joint borrowers. This saves you from making two payments. However, be sure to read the terms carefully.
When you default on any loan, the lender can seize the asset you pledge as collateral. In a home loan, this asset is your home.
With a home loan insurance policy, you need not stress about the asset being seized when you default on the loan repayment in the case of an unfortunate event. This keeps your home secured.
No, buying a home loan insurance policy is voluntary and not mandatory. However, since the policy offers many benefits to keep your home and your family secure, you may opt for it.
Compare different home loan insurance plans before finalising to ensure that the plan suits your needs
You can avail the plan from a general or a life insurance company
If you purchase from a general insurer, the premium amount may be low, and the renewal will take place annually
Choose add-on covers to ensure the coverage is comprehensive and the premium is manageable
If you pay the premium in EMIs with your home loan EMIs, you may not get the tax benefits
You can purchase the policy by visiting the policy provider’s office or online
Yes, you can claim the tax benefits of such insurance policies under Section 80C of the Income Tax Act, 1961.
Under this section, you can get a deduction for the premium amount paid. However, the benefit may not be available if you pay the premium in EMIs with the home loan.
You can buy regular insurance whenever you want. However, you can get home loan insurance only when you have an existing loan or are applying for one.
While home loan insurance tenure ends with the home loan tenure, you can choose a tenure in a regular insurance scheme.
A home loan insurance plan is not mandatory. It is, in fact, entirely up to you if you wish to get one or not.
No, the RBI does not stipulate that you must have a housing loan insurance plan.
The premium amount you pay for the home loan insurance policy is eligible for tax deduction u/s 80C.
Home loan insurance can be claimed in case of untimely death or an unforeseen situation happening with the insurer. However, this situation must be specially mentioned and covered by the policy.
To be eligible to opt for mortgage insurance, you must have availed of a home loan from a reputed lender.