Guide to insure your home loan

Most lenders not only provide free personal accident insurance along with a home loan but also arrange for optional life insurance cover for you. I looked at insurance products that go hand-in-hand with home loans and how they can help you.

With housing finance easily available today, owning a home is within the reach of most people. However, once you take a home loan, you are liable to repay it in regular installments - come what may. As long as life goes as planned, regular repayment is simply a part of your routine outflows. However, in case of unforeseen eventualities, if anything were to happen to you, the last thing you would ever want is to make your dependent family members go through any hardships to repay the loan. To address these concerns, home loans are now bundled with insurance. In other words, your lender ensures that you insure yourself so as to insure the loan on your home.

Insurance cover for home loan

A home loan is usually clubbed with two types of insurance plans - free personal accident insurance and an optional term insurance plan for which you have to pay premium. Almost all home loan lenders bundle the loan with free personal accidental death insurance. As per this scheme, in the unfortunate event of an accidental death of the primary borrower, the equated monthly installments (EMI) for the balance period of the loan get waived.

If the optional term insurance cover is also taken, in case of the unfortunate demise or permanent disability of the borrower, the insurance company will clear the balance dues on the loan, thus protecting his family from falling under the burden of debt. In insurance parlance, this scheme is known as a 'loan cover term assurance policy'. What is insured under this plan is the home loan and not the home itself.

The minimum and maximum terms for such policies is three and 25 years, respectively, and the maximum sum assured ranges from Rs 50 lakhs to Rs 1 crore, depending upon the lender. The cover on such a policy keeps reducing as and when the EMIs on the loan are paid. This is because only the outstanding loan amount is insured under this policy and not the total principal loan amount.

Who insures home loans?

For such plans, housing finance companies have tieups with life insurance companies to offer the scheme. For instance, the State Bank of India has an arrangement with its insurance arm, SBI Life, to offer a term insurance product along with its home loan. Similarly, for the home loan insurance cover offered by IDBI Bank, Birla Sun Life Insurance underwrites the risk cover.

Amount of premium payable

Since these covers are typically 'group life insurance' schemes (i.e. the home loan lender takes a policy for all its borrowers who opt for the cover), you can benefit by way of a reduced premium on the policy. The pricing of premium is determined by parameters such as your age, the total home loan amount, the tenure of the loan and lastly, your medical record. For instance, for a person aged 40 years, with a loan amount of Rs 20 lakhs and tenure of 15 years, the total premium amount will be around 2.5 percent of the total principal loan amount.

Payment of premium

Lenders allow you to pay the premium in two ways - if you have the requisite funds, you can pay the entire premium on the policy as a single lump sum amount while availing of the home loan or you can choose to pay the premium on a monthly basis by taking a loan for the premium amount (apart from the home loan).

Where you have paid the premium as a lump sum from your own funds, since you have purchased a life insurance policy, this amount is eligible for a tax deduction under Section 80C of the Income Tax Act. However, if you have taken a loan to purchase insurance, the premium amount is clubbed with your EMI. This amount is added to the principal loan amount and interest is computed on the total loan outstanding i.e. home loan plus premium payments. The total interest paid by you during the year on this total loan amount gets a tax deduction under Section 24 of the Income Tax Act while the total principal amount repaid during the year gets tax deduction under Section 80C.

Health check-up not mandatory

Generally, lenders have relaxed norms while offering this policy and in many cases, a health check-up is not a pre-requisite. However, depending upon your age and other loan considerations, such as the amount, tenure etc, you may need to get a medical examination done. These rules differ from lender to lender.

When does the policy come into force?

Your insurance cover will get activated once your application is approved by the insurance company, the home loan amount has been drawn down by you and lastly, the premium amount has been received by the insurer. You will also receive a certificate of insurance which will reflect the effective date of the coverage.

What if you pre-pay your home loan?

In case you pre-pay a certain portion of your loan, you will continue to receive the benefit of the insurance cover for the balance outstanding amount. However, in case of a premature closure of the loan, a corresponding amount of premium will be refunded to you by the insurance company.

Joint home loans also eligible

For a joint loan, lenders usually insist on two separate insurance policies to be taken in the names of the joint applicants. The premium amount to be paid also gets doubled. Some lenders offer discounted rates of premium (10 to 50 percent discount on the actual premium amount) to the younger applicant on such loans.

Settling of a claim

In the event of unfortunate death or disability, the necessary documents will have to be submitted to the lender, who, in turn, will give the relevant proof pertaining to the claim to the insurer. Once the claim is approved, the insurance proceeds will be paid directly to the lender. The claim amount will be equal to the outstanding loan as per the repayment schedule.

Word of caution

The cover that comes along with a home loan is a term insurance product. Therefore, to put it simply, you will not be able to get back the premium paid if you survive the loan repayment tenure. However, the amount paid as premium over the entire tenure of the loan will be insignificant as compared to the huge protection that it provides.

Get insured now

If you are adequately covered by life insurance at present, you might feel that you do not need to insure yourself further simply to cover your home loan amount. However, your existing life insurance is meant to satisfy a different set of your family's financial needs in your absence. Therefore, it becomes important to consider buying a loan cover term assurance as well. If you have an existing home loan but no insurance, find out from your lender if you can avail of one for the balance period of your loan.