With the changing time and the high inflation rate, nowadays buying a home has become a super expensive affair. The increased property rate has made a home loan near to unavoidable for almost all home buyers. However, a home buyer’s financial plans may get drained if unforeseen or unfortunate happenings like death, disability or job loss occurs. To fight against the uncertainty of life, most of the times 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 an HLPP while availing a home loan. However, buying a insurance in order to avail a home loan is not declared mandatory by RBI. So before we make our mind on whether to buy an insurance or not, let us first understand what is HLPP and how it works.
What Is Home Loan Protection Plan?
The home loan protection plan is an insurance plan which gives an insurance against your home loan. Such type of insurance companies settles any outstanding amount on the home loan with the bank/lender in the event of the death of the borrower. The policy term will be same as the loan tenure. It means for a home loan of 20 years, the policy term will also be of 20 years only. By purchasing an HLPP the home loan borrower can ensure that in the case of the demise of the sole borrower, his/her family will not have to face financial issues because of paying EMI. In the case of death of the borrower, the insurance company will pay the outstanding balance to the lender and hand over the property documents to the members of the borrower’s family.
Features of Home Loan Protection Plans (HLPP)
- A home loan insurance is a pure Decreasing Term Insurance Policy.
- Most of the home loan insurances work only with Death Benefit whereas there are only a few insurers who cover other disabilities regarding repayment of the loan.
- One can pay the premium at a single installment.
- The other way of paying premium is being incorporated in the loan payment and pay as installments.
- The Sum Assured keeps decreasing every year as per the policy schedule.
- No Maturity Benefit comes in this 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 Remember While Choosing Home Loan Insurance
If you are about to buy an 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 times, the insurance provider is promoted by the relationship officer of the bank but one must look into the matter with diligence. Here are some of the points which one should check prior to buying the loan insurance.
Payment Method– The is one of the crucial checklists to consider while buying the insurance. The payment of different home loan insurance plans come at a different mode of payment. Generally, a loan insurance is premium is paid in three different ways- a) Single premium payment, b) Regular premium payment & c) Limited premium payment. Once the lender prescribes you any particular lender, make sure the payment mode and pros and cons of the same. Knowing the payment mode will help you to have a better selection on the insurer.
Coverage– The coverage of the insurance is the next point which one has to check. Not all insurance companies provide a coverage for job loss, disability, critical illness, unforeseen professional disaster, suicide etc. One needs to be confirmed on the coverage of the insurance. With a coverage of more aspects, the insurance price is likely to be increased.
Tax Benefits– Note the point that a home loan insurance does not attract tax benefits. Though home loan interest payment and home loan principal repayment both attracts 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. By this way, you will lose out on a major tax benefit.
Most of the times people get confused between these two types of insurances. Home loan insurance and home insurance are completely different. However, they sound similar and people often get confused between the two of terms. A home loan insurance plan covers only your home loan. If the borrower is unable to repay the borrowed amount due to death, disability or critical illness, the insurance company will repay the amount to the lender. On another hand, a home insurance plan covers your home and its contents against accidents like fire, explosion, lightning strike, etc. A home insurance even provides a protection against theft or burglary. So basically, a home loan insurance covers the debt while a home insurance covers any kind of damage to the home and its content.
How Is Home Loan Insurance Beneficial For The Lender?
Most of the lenders insist on potential borrowers to buy an HLPP as they want to protect their interest. It is obvious that no lender will want to turn their loan into a bad credit. With an HLPP lenders cover 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 an 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 a pressure on the borrower to buy an insurance to earn that extra incentive.
How Is Home Loan Insurance Beneficial For The borrower?
As mentioned above, selling an HLPP is beneficial for the lender, there are even some benefits for the borrower too.
A home loan insurance covers the outstanding debt on your home loan. It ensures that the family of the borrower will to 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 that 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 a financial pressure. So whether you buy from the lending bank or buy one on your own, getting home loan insurance is always advisable as it makes you play your game on the safe side.
The Pitfalls Of Home Loan Insurances
Most of the times, home loan insurances whiles paid in a single premium, does 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 a financial pressure. Though one can avail this insurance at an ease but there are pitfalls to consider while buying this product.
Firstly, there will not be any tax benefit available to you on the premium amount.
Secondly, There is no maturity benefit.
Thirdly, HLPPs are expensive than general term insurances.
Fourthly, HLPPs become null and void if you change the lender.
Fifthly, most of the HLPPs does not cover death under Natural Reasons or Suicide
The Last Words
An insurance is a must-have product for every home buyer. Buying an insurance is always a financially appreciable decision. When buying a protection plan, one has to be sure that it meets your needs. 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. Whether it may be a term insurance or an HLPP, will have its own advantages and disadvantages. One has to study all the options in depth and weigh their benefits/drawbacks before finalizing any of the products.