With the changing time and the high inflation rate buying a home has become a super expensive affair. The increased property rate has made a home loan unavoidable for most of the home buyers. However, a home buyer’s financial plans may get drained if unforeseen or unfortunate happenings like death, disability, or job loss occur. To fight against the uncertainty of life, most of the time a home loan is bought with a Home Loan Protection Plan (HLPP). Those who have been through the home buying process must have experienced that lenders insist on buying a home loan insurance plan. Even sometimes, lenders are found to make it mandatory to have a Home loan protection plan (HLPP) while availing a home loan.
What Is a Home Loan Protection Plan?
The home loan protection plan is an insurance plan which gives cover to your home and home loan as well. The insurance companies settle the outstanding amount on the home loan with the bank/lender in the event of the death of the borrower. For a home protection plan, the policy term remains to be the same as your home loan tenure.
By purchasing an HLPP the home loan borrower can ensure that in the case of the non-survival of the borrower, the family remains free from the financial liability of paying home loan EMIs. In this case, the insurance company pays the outstanding amount to the bank and hand over the property documents to the borrower’s family. However, buying a home loan insurance to avail of a home loan is not yet mandatory by RBI. So before you make your mind on whether to buy insurance or not, let us first understand the HLPP’s features.
Home Loan Protection Plan (HLPP) Features
- A home loan protection plan is a decreasing Term Insurance Policy.
- Generally, home loan insurances work only for Death Benefit whereas there the disability benefit lies only with a few, so while you select the one you need to be careful.
- Most home loan protection schemes come with a one-time premium payment option. However, during the repayment of the outstanding loan amount through EMIs, one can also club the premium in the EMI.
- The Sum Assured keeps decreasing every year as per the policy schedule.
- There is no Maturity Benefit in a home protection plan.
- In the unfortunate case of death of the borrower, the insurance company will pay the corresponding Sum Assured is paid as Death Benefit and the policy will be terminated.
Things to know about a Home Loan Insurance
If you are about to buy insurance for your home loan, you must look into some of the critical factors so that the insurance which you buy meets your needs. Most of the time, the insurance provider is promoted by the relationship officer of the lender but there are certain things one must know while opting for a home loan insurance plan.
Here are some of the points which one should check before buying the loan insurance.
Payment Method– The payment method is one of the checklists to consider while buying the insurance. The payment of different home loan insurance plans comes at a different mode of payment. Generally, loan insurance is premium is paid in three different ways-
a) Single premium payment
b) Regular premium payment
c) Limited premium payment.
Knowing the payment mode will help you to have a better selection of the insurer.
Coverage– The coverage offered by the insurance is yet another factor that one has to consider while selecting a home loan insurance policy. This is important as not all insurance companies provide coverage for job loss, disability, critical illness, unforeseen professional disaster, etc. Hence, before selecting one, it is a must to be aware of the coverage of the insurance. Well, the premium of your insurance is more likely to increase with the coverage.
Tax Benefits– The home loan insurance plan does not offer any tax benefits. Though home loan interest payment and home loan principal repayment both attract tax benefits the insurance premium payment is lacking this feature. If you opt for a single payment mode for your insurance premium, the bank will pay the amount to the insurance company. The same amount will be distributed equally in every EMI payment. In this way, you will lose out on a major tax benefit.
How Is Home Loan Insurance Beneficial For The Lender?
Most of the lenders insist borrowers to buy an HLPP as they want to minimize the risk involved. No lender will want to turn their loan into bad credit and as home loan insurance provides cover to the home loan, a lender always wants their borrowers to opt for this insurance plan. HLPP covers the risk of NPA in the case of the death of the sole borrower. However, if the borrower has sufficient life coverage, he/she may avoid the HLPP. Another thing to consider is that insurance is a third party product. Generally, banks earn commission on selling insurance which acts as another incentive for the bank. Some of the lenders make pressure on the borrower to buy insurance to earn that extra incentive.
How Is Home Loan Insurance Beneficial For The borrower?
Home loan insurance covers the outstanding amount of your home loan. It ensures that the family of the borrower will need to evacuate the mortgaged property if the sole borrower is unable to pay the EMIs. Most of the HLPPs cover disabilities along with the death of the sole borrower. It means, if the sole borrower becomes unable to pay off the loan because of some serious illness or job loss, the insurance company will pay off the loan. Buying a home loan protection plan is very easy. Your policy premium amount will be added to the EMI amount which makes a very slight change in the EMI amount. So, such insurance can be bought without financial pressure.
The Pitfall
Most of the time, home loan insurances, while paid in a single premium do not make a considerable change in the EMI amount. At this point, most of the home loan borrowers agree to have the insurance as it comes without financial pressure. Though one can avail of this insurance at an ease but there are pitfalls to consider while buying this product.
- There will not be any tax benefits available to you on the premium amount.
- There is no maturity benefit.
- HLPPs are more expensive than general term insurances.
- HLPP becomes null and void if you change the lender.
- Most of the HLPPs does not cover death under Natural Reasons or Suicide.
The Bottom Lines
Home Loan Insurance Plan is a must-have product for every home buyer. Buying insurance is always a big financial liability, but buying a protection plan for your home loan insures the repayment of your home loan when you are not there. Each lender used to have a tie-up with the third party (insurance companies) which limits your choices. One should not assume that his/her lender is providing the best product in the market. One must compare and decide objectively.
