When you take out a home loan, you are taking on a significant financial responsibility that will need to be repaid over a long period of time. However, unexpected circumstances such as death, accident, or job loss can make it difficult for you to meet your monthly repayments. This is where home loan insurance comes in. Essentially, home loan insurance (also known as mortgage insurance) provides coverage for the borrower and ensures that the home loan is repaid even if the borrower is unable to make the payments due to unforeseen circumstances. It’s important to note that home loan insurance is different from home insurance, which is designed to protect your home against unexpected events. With home loan insurance, you can rest assured that your loan will be repaid, even in your absence.
Is Home Loan Insurance Necessary?
These days, it has become commonplace for financial institutions to offer home loan insurance as part of their home loan package. It’s important to note that there are no insurance regulations mandating the purchase of home loan insurance alongside a home loan. However, it is highly recommended that you consider buying it in order to safeguard your investment and loan repayment in case of unforeseen circumstances.
Before finalizing a home loan protection plan, it’s important to conduct due diligence. You are not obligated to purchase it from your lender and have the freedom to choose any home loan insurance plan that suits your needs. Take the time to compare plans and select the one that best suits your unique situation.
Top 6 Reasons Why you need Home Loan Insurance
1. Protects Your Investment:
Home loan insurance serves as a safeguard for your investment in case of unexpected events such as the borrower’s death, accidents, or job loss. This type of insurance ensures that the loan is settled even in unfavorable circumstances, providing financial security and peace of mind.
2. Easy Premium Payment:
Home loan insurances typically come in the form of single premium policies, which require payment of the premium only once. Given the high cost of these premiums, lenders often offer the option of adding the premium amount to the loan itself, with the added benefit of deducting the premium along with the EMI payments.
3. Tax Benefits:
It is important to note that while home loan insurance can provide tax benefits under section 80C, this benefit may not apply if you opt to include the premium in your loan amount and pay it through EMIs.
4. Single Policy for Joint Loan:
When taking out a joint home loan, a single home loan insurance policy provides coverage for all borrowers.
5. Additional Coverage:
Home loan insurance can be enhanced by adding add-ons or riders at an extra cost to provide additional coverage. These additional features fortify the policy by safeguarding against unforeseen circumstances such as critical illnesses, medical conditions, accidental death, disability, or loss of employment.
6. Protects Family:
Home loan insurance offers protection to the family of the policyholder in the event of an unfortunate situation. It can help alleviate the financial burden of loan payments and prevent the loss of the invested funds.
Home loan insurance provides benefits not only to borrowers but also to lenders. It serves as a safeguard for lenders against the risk of bad debts. When you take out a home loan, your home is used as collateral, and in the event of non-payment, the loan becomes a bad debt. Lenders may need to seize the property to recover the dues. By having home loan insurance, lenders can avoid the risk of bad debts and save a significant amount of time and effort that would be required to liquidate a property linked to a bad debt account.
Ways to Ensure Your Home Loan:
There are two options available for a borrower to obtain home loan insurance:
1. Home Loan Insurance –
This protection plan is designed to cover the outstanding loan in case of unexpected events. It features reducing coverage, which means that the insurance amount decreases every year in line with the declining home loan amount. If the borrower passes away during the loan period, the home loan insurance company will settle the loan balance. However, if the loan amount is paid off, the insurance policy will lapse. Similar to other insurance policies, a premium is charged for home loan insurance, which is dependent on factors such as loan amount, tenure, age, and medical records of the borrower. This type of insurance can only be purchased if the individual already has an existing home loan or is in the process of applying for one.
2. Term Insurance –
This content explains that purchasing a plan can provide coverage for any liabilities in case of an unfortunate event. The sum assured will be paid to the nominee who can use it as needed. This coverage remains the same as any other insurance plan. The nominee will receive the sum assured and can use it to pay off any outstanding loans. This plan is available for purchase at any time. If you already have a term plan, you can add an additional amount equal to the loan amount to ensure that your family’s expenses are not affected.
Things To Remember Before Buying The Home Loan Insurance Policy:
A home loan borrower has the option to buy insurance for their mortgage from either a general insurance company or a life insurance company.
Every year, policyholders must renew their policies provided by general insurance companies to maintain coverage, and as a result, they can enjoy reduced premiums.
Life insurance companies offer extended coverage at a higher premium through their policies.
If you plan on transferring your home loan to a different lender in the future, it’s important to make sure that your home loan insurance is in accordance with the policies of the new lender. Otherwise, you may need to restructure your insurance to avoid any lapses in coverage.
In the event of an interest rate hike leading to an extension of the home loan tenure, the current home loan insurance premium will prove inadequate to cover the total loan amount.
If you choose to prepay your home loan, a portion of the total home loan insurance premium will be forfeited. To prevent this loss, it is advisable to opt for an annually renewable policy instead of a single premium policy.
It’s important to differentiate between home loan insurance and home insurance. While the former safeguards your mortgage, the latter provides protection for your property and its belongings.
Conclusion
Purchasing a house is a substantial and long-term financial commitment, and no one can accurately predict what may happen in the span of 20 to 30 years. Thus, it’s wise to prepare for an uncertain future. While it may not be required by law, it’s recommended to safeguard your investment and loved ones by obtaining home loan insurance. You may obtain a policy from your lending institution along with your home loan or research the market to discover the best option for you. Additionally, protecting your home and its contents from unforeseen disasters like fire, theft, etc. is essential by investing in HOME INSURANCE.
