Owning a home is one of the most cherished dreams, especially for those who have been living in a rental house. And with RBI cutting its key-lending rate for commercial banks by 75 basis points so far this year, home loans are expected to become cheaper and more attractive for those planning to buy their own homes. But while availing the home loan from the lender, one is expected to come across a situation where the bank may ask the borrower to also buy a life insurance policy along with the loan.
While the lender cannot force the borrower to buy the insurance cover, it is important to know why one should consider going for the life cover, and what all he or she should keep in mind.
Rakesh Goyal, Director, Probus Insurance, said, “Typically in India, whenever one gets the sanction of home loans, banks or housing finance companies try and sell them home loan insurance. Idea is that policy pays the sum assured when the policyholder has been diagnosed with any of the some critical illnesses, accidental death or permanent disability, depending on the insurance product. Incase the policyholder dies, not having taken a life cover will impact the overall finances of the family. Either family members have to pay the loan amount or vacate the property.”
He added that if the borrower has taken the life cover, equal to the loan amount, his or her family will be free from all the hassles in case of an untimely death. However, he warned against bankers forcefully trying to sell expensive home loan insurance policies, which often happens.
“Investors should be very clear that banks can’t force them to buy the cover along with the loan as there are very clear guidelines by the regulator which states that banks can’t bundle insurance products with home loans,” Goyal added.
Subhash Nagapal, CEO and Founder, ComparePolicy.com, said, “A person is able to buy a home only after putting in a lot of effort, research, and investment of hard earned money towards that dream. Now, borrowers too have high risks and he should protect his asset against those risks with the biggest being the risk of early death. In such a situation, term insurance is the only instrument that can come to one’s rescue.”
Nagapal explained that a term insurance is the most basic and cheapest form of life insurance meant to provide financial protection to the family as it provides a high degree of cover at a fairly low cost.
“So, if you have a home loan, it is highly recommended to have term insurance cover. If the bread earner of a family loses his life, then there will be a default on EMIs, which may result in your house being taken away by the lender. If you take a term insurance plan then the payout in case of death will be lump sum, and that can take care of the home loan amount. There are also critical illness plans so that if you become incapacitated, or develop a life-threatening disease, the plan covers your loan payment,” he added.
However, apart from a simple term plan, many insurers have also come up with home loan protection plans, a single premium term insurance plan that covers the outstanding loan amount. These plans are specifically designed for this purpose and wherein the loan is automatically settled in case of premature death of the borrower.
However, most financial advisors still recommend a simple term insurance plan because not only they are cheaper, but provide fixed payout unlike home loan protection plans in which the cover keeps depleting with each EMI paid as they only cover the outstanding loan amount.
Goyal suggested that policyholders should increase their term cover to take care of the additional liability they have taken on in the form of a home loan instead of buying the home loan insurance.
“One of the advantage of buying term plan instead of home loan insurance is that a term plan covers the policyholder for 20 or 30 years, while a home loan insurance covers him only while the loan is in force. In case a person prepays the loan and closes it early, the life cover he has through home loan insurance also ends, which can pose a risk in the later years of life. A term cover will cover not only the outstanding home loan but also take care of other financial needs in case of the policyholder’s untimely death,” he said.