Is it compulsory to take insurance on a home loan in India,

Is it compulsory to take insurance on a home loan

No, it is not compulsory to take home loan insurance in India. However, many banks sell it along with the home loan as a package. Some banks will hard sell the product to you and even tell you that it is mandatory. 

Let us understand what is Home Loan Insurance and why do you need it?

A Home Loan Insurance Plan basically covers your outstanding home loan liability which means that in case of the borrower’s death, the Bank will recover the outstanding loan amount from the insurance company and not resort to auctioning the house. Nobody would want their families to suffer in case of an untoward incident. Therefore, it is important to cover your liabilities with an insurance plan. 

But is Home Loan Insurance Plan the best way to insure yourself for your home loan liability? You must know that a home loan insurance is quite expensive as compared to a pure term plan. And it becomes even more expensive if you opt for additional riders such as additional cover for critical illness, damage to home items etc. 

Some banks will tell you that you don't have to pay for it upfront, but that does not mean it is free or complimentary. It will be charged in the EMI which means that your Home Loan EMI will increase to factor in the premium for the home loan insurance. 

What is the best way to insure your Home Loan?

The best way to insure is to take a pure term plan. A term plan is the most cost-effective insurance that insures you against all your liabilities including home loan. So, if your term cover is not sufficient, you can increase the cover.

I recommend that you go through this article - Home Loan Insurance – Is it best option to insure home loan? for better understanding.

Buying insurance with a home loan is not compulsory. Should you still get it?

Neither the law nor the regulatory bodies such as RBI or IRDAI have made the purchase of home loan protection plan with a loan mandatory.

Do not adjust for the home loan liability into the existing term cover as it will compromise with your family needs.

Picture this: You walk into a bank branch to get a home loan. You have given the bank all of the necessary documents and your credit score is good. However, the lender is adamant that you do one more thing - get an insurance plan as well. Some will go to the extend of saying that you will not get the home loan unless you buy an insurance plan as well.

Although it is essential to buy an insurance cover while taking a loan you are under no obligation to do so, not from any bank nor non-banking finance company. "It is not mandatory to purchase home loan protection plans. Neither the law nor the regulatory bodies such as RBI or IRDAI have made the purchase of home loan protection plan with a loan mandatory. Purchasing an insurance plan is the sole discretion of the buyer and borrowers cannot be forced to purchase such plans,"  You can buy the cover from any life insurance company, independent of the lender.

What the lender asks for

Generally, lenders insist that you buy a single premium term insurance plan to take care of the liability. To sweeten the deal, they offer to add the single premium amount to the loan. So, in a way, the borrower does not have to pay anything upfront and still get the loan insured. As a result, the equated monthly instalment (EMI) amount increases a bit without pinching the pocket much.

What's the premium?

Let's see if someone wants to cover a Rs 30 lakh loan for 15 years and looks to buy a term insurance plan. On an average the annual premium for Rs 30 lakh for 15 years is Rs 3,200, i.e., a total of Rs 48,000 will be paid over 15 years. Instead, the single premium comes at Rs 34,000 for a cover for 15 years. Ask the lender to share the premium figure and compare it with those from life insurance companies and then take a call accordingly.

Getting the loan covered

Taking a home loan adds to one's liability. In case of death of the borrower, the liability to pay off the loan falls on the surviving family members. Having an insurance cover will serve the purpose and help meet the financial liability. In such a situation, a term insurance plan, which is a pure risk cover plan, suits the most as they are low-cost, high-cover plan with no maturity value.

Pitfalls

Without increasing the EMI considerably, the deal looks fine. However, remember, there will not be any tax benefit available to you on the premium amount. In case you buy a term insurance plan, the premium paid qualifies for section 80C tax benefit. "Also, if they are a single premium policy bundled with your home loan, you would not be able to port your insurance plan if you ever switch your lender,

Handling the situation

At times, lenders may refuse to give you the loan unless one gets it through them. You might give in as restarting the entire exercise of searching the right lender can be rather tedious. So, what do you do in such a situation? "If you are being pressurised to purchase a home loan cover for the home loan, communicate to the lender that you know that it is not mandatory to buy home loan cover to get a home loan. Also, request them to give a written document that home loan cover is mandatory to get a home loan. This will deter them from pushing any non-mandatory products,"

If the lender is still adamant and not willing to sanction the loan amount, it's better to approach the higher officials of the bank. "Reach out to the senior management in the bank regarding the matter. If none of this helps, you also have the option to raise a complaint to the Banking Ombudsman following proper procedure,"

What you should do

If you already have a term insurance plan then top it up with an amount equal to that of the home loan. Do not adjust for the home loan liability into the existing term cover as it will compromise with your family needs. Ideally, one should have a cover of at least 10 times of one's income. So, if you already have a Rs 80 lakh term insurance cover and the loan is of Rs 30 lakh, then get an additional cover equal to the loan amount, i.e., Rs 30 lakh.

However, if you do not have a term insurance plan, estimate the total amount that your family would need including the home loan liability, and then buy it the day you have the loan sanctioned. In the above example, one needs to get a cover of Rs 1.1 crore to meet the protection needs of the family and to cover the loan. Remember, the additional cover will only be for the tenure of the loan. Once the loan outstanding becomes nil or when it is paid off, drop the term plan earmarked towards it.

How much is insurance on a home loan?

For example, if you borrow a loan amount of Rs.30 lakh and the home loan protection that you opt for costs Rs.1.5 lakh, you will have to pay your EMIs calculated on Rs.31.5 lakh. Life cover – Most home loan protection plans offer life coverage equivalent to home loan outstanding amount.

Home Loan Protection Plan Cover is Valid only for 5 Years

The Protection Cover of HLPP is mostly valid for 5 years not for the whole term of the Home Loan and after 5 years, it needs to be renewed whereas Pure Term Insurance Plan Cover is applicable through out the Life of insured person.

it is not compulsory to take home loan insurance in India. However, many banks sell it along with the home loan as a package. Some banks will hard sell the product to you and even tell you that it is mandatory. Let us understand what is Home Loan Insurance and why do you need it?A Home Loan Insurance Plan basically covers your outstanding home loan liability which means that in case of the borrower’s death, the Bank will recover the outstanding loan amount from the insurance company and not resort to auctioning the house. Nobody would want their families to suffer in case of an untoward incident. Therefore, it is important to cover your liabilities with an insurance plan. But is Home Loan Insurance Plan the best way to insure yourself for your home loan liability? You must know that a home loan insurance is quite expensive as compared to a pure term plan. And it becomes even more expensive if you opt for additional riders such as additional cover for critical illness, damage to home items etc. Some banks will tell you that you don't have to pay for it upfront, but that does not mean it is free or complimentary. It will be charged in the EMI which means that your Home Loan EMI will increase to factor in the premium for the home loan insurance. What is the best way to insure your Home Loan?The best way to insure is to take a pure term plan. A term plan is the most cost-effective insurance that insures you against all your liabilities including home loan. So, if your term cover is not sufficient, you can increase the cover.I recommend that you go through this article - Home Loan Insurance – Is it best option to insure home loan? for better understanding.