Today I will discuss the Home loan insurance. What it is and whether you should opt for it or not? Whenever you are going to buy a property, the bank will ask you to opt for home loan insurance to safeguard their debt. Many of the banks are selling home loan insurance telling that it is mandatory to buy with the home loan. I will also compare Home Loan Insurance vs Term Insurance and check which one is better and why.
Most of the properties in India are bought with the home loan. So you can imagine the market size of this product. It’s huge. The banker will tell you to buy the home loan insurance to cover the home loan liability.
So to cover this risk of the bank, they are forcing people to opt for home loan insurance. Most people do not understand what is the home loan insurance and whether they should opt for it or not.
So let’s check what is the home loan insurance
What is Home Loan Insurance?
The home loan insurance is the insurance policy that covers the risk of non-payment of the remaining home loan in the event of the unfortunate death of the person who has taken a home loan. It is also known as a home loan protection plan.
You must understand here that it covers the home loan liability and not the home property damage. For example, If there is any natural calamity like flood or earth quack and the property is damaged, then this home loan insurance policy will not work for you.
But If the person who has taken a loan, dies unexpectedly then this policy will pay the remaining amount to the lending bank. So there will be no burden on the family for paying the loan.
This is also known as Home Loan Protection Plan (HLPP). The policy term here will the equivalent to the tenure of the home loan.
There are two options under this policy.
Reducing cover
Reducing cover means it covers the remaining home loan amount only. For example, if a person has taken a loan for 20 lakhs in the year 2015, and as on date, the loan outstanding amount is ₹ 17 lakhs. So only ₹ 17 lakhs will get covered under this policy.
Let’s take the example of Amit Sharma who is 30 years old.
He has taken a home loan for ₹ 40 lakhs at 8.5% for 20 years.
His EMI amount would be around ₹ 35000/month.
HLPP premium with reducing cover option would be around ₹ 450/- per month.
There is also an option to pay the insurance premium upfront in a single shot. The amount would be around ₹. 80k to 1 lakh.
For the monthly premium payment, the premium amount will be added to your loan EMI amount.
Fixed Cover
Under this option, if Amit is taking a home loan for ₹ 40 lakhs, then the full amount will be covered under the HLPP policy. The premium would be obviously higher. The monthly cost of the premium would be roughly around 800 per month.
Many times, banks are clubbing the home loan insurance with the home loan product and sell it as a bundle. Remember that this home loan insurance is not mandatory and you can deny the bank for taking this insurance policy.
Home loan insurance policy is not a property insurance policy. HLPP covers only the home loan liability and not the property itself.
Home Loan Insurance vs Term Insurance
Now let’s compare Home Loan Insurance vs Term Insurance and check which one is better among the two.
We will take the same example as mentioned above.
The below table shows the comparison between home loan insurance and term insurance.
| Particulars | HLPP | Term Insurance |
| Insurance Amount | 40 Lakhs | 40 Lakhs |
| Tenure | 20 Years | 20 Years |
| Monthly Premium | ₹. 800* | ₹. 500 |
₹. 800 for fixed cover, the amount would be around ₹ 450 for reducing cover.
As you can see that the insurance premium of the HLPP with reducing cover is around ₹ 450/- as compared to the Term insurance premium of ₹ 500/-.
But if you check in detail, you will find that you will get all the benefits of HLPP with a fixed cover option under a term insurance plan with lesser premium.
Here going for the fixed cover is always better than the reducing cover. Here is why.
| Death After | Loan Outstanding |
| 5 Years | 35.25 Lakhs |
| 10 Years | 28 Lakhs |
| 15 Years | 16.90 Lakhs |
As you can see in the above table, if a person dies after 5 years of loan tenure then the loan outstanding at that time would be ₹. 35 Lakhs. If he dies after 10 years of tenure then the loan outstanding would be ₹. 28 Lakhs. For 15 years the loan outstanding would be ₹ 17 Lakhs.
So the family will only the remaining amount under reducing cover. While in the fixed cover and Term insurance policy the family will get the full coverage amount i.e. ₹ 40 Lakhs.
So after checking the above example, It is certainly coming out that the term insurance is the best option as compared to home loan insurance.
Benefits of opting term insurance over home loan insurance
- Full amount coverage
- Low insurance premium as compared to HLPP
- The flexibility of using the additional amount
| Particulars | Home Loan Insurance | Term Insurance |
| Tax Benefit under 80C | Yes | Yes |
| Additional Riders | Yes | Yes |
| Insurance Premium | Costly | Cheaper |
| Coverage | Partial | Full |
| Flexibility | Low | High |
| Joint Home Loan | Covers all borrowers | Covers only one |
FAQs – Home Loan Insurance vs Term Insurance
No, it’s not mandatory to purchase a home loan insurance policy.
Bank cannot auction your property if you have taken home loan insurance.
The fixed option is better as it covers the full loan amount.
The premium amount will be added to your monthly EMI. There is also an option for one time upfront payment.
The major factors affecting your premium are loan amount, interest rate and loan tenure.
Yes, you can claim it under section 80C of the Income Tax Act.
Yes, you can opt for critical illness, disability, accidental death, etc.
No, you cannot change the insurance company under HLPP.
Conclusion:
From the above comparison of Home Loan Insurance vs Term Insurance, it is clearly coming out that, home loan insurance is not the best option to cover the risk of loan liability. It is better to go for a term insurance policy which is cheaper and more flexible as compared to HLPP.
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