There is always a fear in borrower’s mind that if something unexpected happens to him/her in near future, who will repay the balance home loan amount. Consumer will not want that the burden of home loan to fall on family after his/her untimely demise. Life is unpredictable; this thought becomes recurrent in the mind of borrower, as home loan is associated long-term which can go up to maximum 30 years. Therefore, it’s sensible for borrowers to keep this thought in mind and plan things accordingly. However, purchasing home loan insurance is not mandatory while taking any loan from lenders including banks, NBFCs or housing finance companies.
As per regulatory bodies, such as RBI and IRDAI, it is not mandatory to purchase a home insurance plan, if a borrower is taking a home loan from any financial institution.
What is Home Loan Insurance?
Home Loan Insurance, also known as Home Loan Protection Plan (HLPP) is a scheme offered by almost every financial institution in which the insurer will settle the outstanding or balance home loan amount of the borrower with the lender or bank, if there is a situation of unforeseen circumstances that may include demise of the borrower.
Home Loan Protection Plan (HLPP) or Home Loan Insurance in simple terms can be called as insurance plan. Under which insurance company settles the balance amount of home loan with banks, NBFCs or housing finance companies, in case of death of borrower. The policy term is usually the same as the loan tenure. By availing Home Loan Insurance the borrower is relieved that even after his/her demise, his/her family will not be asked to repay the home loan or vacate the home because of non-payment of the loan amount.
Below are the key features and benefits of Home Loan Insurance:
Features and Benefits of Home Loan Insurance:
- Home Loan Insurance provides lump sum amount benefit which can be used further to repay the outstanding home loan.
- Policy could lapse in case of home loan balance transfer, home loan restructuring or full repayment of loan amount.
- Lump sum amount is paid to the beneficiary of the home loan or policy holder.
- Under Section 80C & 80D, borrower gets the tax benefit from home loan.
- Under a joint loan, single home loan insurance can cover all the borrowers.
- With some extra premium, medical conditions like disability and critical illness can also be covered in home loan insurance plan.
- Borrower has the flexibility to repay the premium which is single/whole payment premium or insurance amount can be adjusted in the total loan amount and can be paid on annual basis.
- Borrowers have the option of converting insurance premium into amount that can be added to the home loan EMIs.
- Home Loan Insurance provides coverage of certain medical illnesses, including cancer and heart attack and many more.
- Home Loan Insurance does not cover suicide or death under natural reasons, which is known as natural death.
Categorization of Home Loan Insurance Premium
Premiums of Home Loan Insurance depends on three main categories that include age of the insured or borrower, loan tenure/ loan amount and medical history of the insured or borrower. Home loan insurance premium also helps in saving the property/home from getting it confiscated by other people. Thus, it becomes essential for borrowers to opt for it for some critical scenarios.
Difference between Home Loan Insurance & Home Loan
People generally get confused between home insurance and home loan insurance. These two terms are absolutely different and serve dissimilar purposes.
Under home insurance, your insurance covers your home against risks that includes:
- Damage of home/property due to theft.
- Damage from natural calamities like earthquake, storm, flood, fire, etc.
This means home insurance is the insurance that cover the replacement cost of your home in case of a damage. While home loan insurance cover the loan you take for buying the property. This plan covers only the outstanding loan liability from the time it is brought.
Most of the lenders have made home insurance mandatory. Whereas, home loan insurance is not mandatory and it depends on the sole discretion of the loan applicant or the borrower.
Also Read: Term Insurance Vs. Home Loan Insurance
Types of Home Loan Insurance
Lenders offer three types of home loan insurance that include Level Plan, Hybrid Plan and Reducing Cover Plan which can be further discussed as follows:
- Level Cover Plan: Throughout the loan tenure, the coverage remains the same for the insured.
- Hybrid Cover Plan: The coverage remains full during the first year. It starts reducing as the balance amount reduce with tenure.
- Reducing Cover Plan: Both the coverage and outstanding loan reduces with the tenure.
It is evident that a borrower can avail home loan insurance if he/she has not already paid for the term insurance. Term insurance and home loan insurance cannot be compared in features but share similarity in the purpose or benefits. Borrowers with home loan should definitely opt for home loan insurance to secure his/her family post any unfortunate happening. However, taking home loan insurance is not mandatory. But, most of the borrowers will still consider it once before taking home loan from any lender.
Home Loan Insurance FAQs
Is Home Loan protection insurance tax deductible?
No, in most of the cases home loan insurance is not tax deductible and the home loan insurance premiums are not included in the property payments.
Is it compulsory to take insurance with home loan?
No, it is not mandatory to take home loan insurance, but it’s like an added advantage if you can afford it, you will not be at loss. Bank cannot auction your house despite any emergency, if you have taken home loan insurance.
Does home insurance get tax benefit?
Yes, if in case the premium is paid by the borrower himself/herself, then he/she is eligible for tax deduction under Sec 80C and Sec 10(10D). Under Sec 80C the maximum amount that can be claimed is up to Rs. 1.5 lakhs.