Home Loan Insurance vs Term Insurance

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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.

ParticularsHLPPTerm Insurance
Insurance Amount40 Lakhs40 Lakhs
Tenure20 Years20 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 AfterLoan Outstanding
5 Years35.25 Lakhs
10 Years28 Lakhs
15 Years16.90 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
ParticularsHome Loan InsuranceTerm Insurance
Tax Benefit under 80CYesYes
Additional RidersYesYes
Insurance PremiumCostlyCheaper
CoveragePartialFull
FlexibilityLowHigh
Joint Home LoanCovers all borrowersCovers only one

FAQs – Home Loan Insurance vs Term Insurance

Is it mandatory to purchase home loan insurance?

No, it’s not mandatory to purchase a home loan insurance policy.

Can bank auction my property if I have taken home loan insurance?

Bank cannot auction your property if you have taken home loan insurance.

Reducing or fixed – which option is better?

The fixed option is better as it covers the full loan amount.

How do I pay the premium amount?

The premium amount will be added to your monthly EMI. There is also an option for one time upfront payment.

How home loan insurance premium is calculated?

The major factors affecting your premium are loan amount, interest rate and loan tenure.

The home loan insurance premium is tax-free?

Yes, you can claim it under section 80C of the Income Tax Act.

Is there an option for additional riders on HLPP?

Yes, you can opt for critical illness, disability, accidental death, etc.

Can I change the insurance company under HLPP?

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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