What is Home Loan Insurance? Why is it Important?
Life is not certain and also doesn’t come with any guarantee cards. Instances like partial or complete disability, or death of the sole bread earner can result in huge financial trouble for the family. And, if there is a home loan repayment running, the situation can get really bad.
Therefore, to avoid such a situation, to protect your near and dear ones from financial trouble due to home loan repayments in the event of the unfortunate demise of the primary borrower, it is advised to take insurance for a home loan. It’s very important for maintaining the financial stability of your family.
Let’s have a detailed view of the topic.
What is Home Loan Insurance?
Home loan insurance is a type of life insurance cover, where in the event of the death of the borrower, the home loan insurer will settle the entire outstanding home loan amount with the lender. And the borrower’s family gets complete ownership of the house property.
How Do I Avail Home Loan Insurance?
A home loan insurance policy is taken while procuring the home loan. Usually, the home loan insurance cover comes bundled with the home loan package, where the premium amount is deducted from the total home loan amount or the lender may ask you to pay the premium.
As home loan insurance cover is not mandatory, meaning, neither RBI nor IRDAI has any rules that force the borrower to buy the home loan cover. You can buy the home loan insurance cover from your preferred insurer.
However, it is better to buy one from your lender, if there is no marginal difference in premium rates to reduce the complexities in the home loan approval process.
How Does Home Loan Insurance Work?
Home loan insurance plans are a type of term plan, where the borrower is covered under this insurance plan until the repayment is complete. Once the outstanding home loan is repaid entirely, the home loan insurance tenure expires.
If the borrower dies during the repayment tenure, and a large part of the home loan amount is still needed to be repaid, the family can claim the home loan insurance cover to settle the entire outstanding home loan amount. This ensures the family will not have to repay the home loan and gets full ownership of the house property.
In absence of home loan insurance cover, the lender will seize the house to recover the losses, even in the case of unfortunate events. Please note that the insurance does not provide cover against situations such as job loss or disability due to accidents.
Lenders such as Grihashakti offer customers plans from top insurance providers which can go above and beyond basic home loan insurance coverage. We allow our customers also to purchase useful policies such as health insurance, accidental health cover, and more.
How Home Loan Insurance Premium is Paid?
Most home loan insurance has a one-time lump sum premium payment option, which is either deducted from the approved home loan amount or the lender asks to pay the additional premium amount.
For example, if the home loan amount is Rs 50 lakh for 15 years tenure, and the premium amount is Rs 1 lakh, the borrower has the option to take either Rs 51 lakh as a home loan or deduct the premium amount from the home loan amount.
However, it is cost-effective to pay a home loan insurance premium annually, because most borrowers prepay the outstanding sum before the tenure ends. While in a one-time premium payment option, the premium is calculated for the entire pre-determined repayment tenure.
Importance of Home Loan Insurance for Borrowers and Lender
The utility of a home loan insurance scheme is unmatched and provides all-around protection to borrowers. Some of the home loan insurance benefits include:
• Protect family: It protects the family from financial uncertainty, in case, if there is a sudden death of the borrower during the repayment tenure. The home loan insurance policy settles the outstanding home loan amount with the lender and the ownership of the property is transferred to the borrower’s family.
• Protect Assets and other collaterals: It protects your assets and other collateral, as the lender will not seize the property to recover the dues of the outstanding loan amount.
• Tax benefits: Since a home loan insurance plan falls under the category of term plan insurance, the borrower can claim a tax deduction under Sec 800 of the Income Tax Act for the premium paid.
• Protects lenders from financial loss. For lenders too. home loan insurance helps them to prevent loan accounts from going bad and go through the time-consuming process of seizing the property to recover dues.
A home loan insurance cover is a win-win financial solution for both parties, as it saves from irreparable financial damage while protecting the property.
Buying your dream home using a home loan is a big financial decision, as the repayment tenure lasts up to several years and EMIs form a significant part of your income.
Having insurance against home loans helps to protect your family against any uncertainty and the burden of home loan repayments is taken care of and they don’t have to abandon the house property due to non-payment.