- Buying a home has become a super-expensive affair in times of high inflation. The rise in the housing market has made prospective house buyers opt for home loans. However, homebuyers’ financial plans can be weighed up against a range of factors, including the event of job loss, disability, or death.
- An applicant who has gone through the process of buying a home must ensure that their lender insists on taking out home loan insurance. Sometimes lenders even make it mandatory to get a “home loan protection plan” (HLPP) before applicants take out a home loan. These insurance plans are bought to combat life’s insecurity.
What Is a Home Loan Protection Plan?
- It is an insurance plan that covers your home loan. In the event of a borrower’s death, the insurance company will settle the outstanding amount of the home loan with the lender.
- By purchasing an HLPP, the borrower can ensure that the family is exempt from any financial liability associated with the payment of the mortgage in the event of his/her non-survival. The insurer pays the outstanding amount to the bank and hands over the documents of the property to the family of the borrower. The RBI has not yet made it mandatory to buy home loan insurance to get a home loan. There is also provision for home loan insurance plan which turns out to be helpful.
So to decide whether or not to buy the insurance, we should first understand the features of HLPP.
What are the Features of Home Loan Protection Plan (HLPP)?
- A home loan programme is a decreasing policy on term insurance.
- Home loan insurances usually operate only for Death Benefits, although there are a few plans for disabilities, so you have to be cautious when picking one.
- Most home loan schemes have a one-time premium payment option. However, you can also club the premium in the EMI while paying the remaining loan balance through EMI.
- Every year according to the policy plan, the amount guaranteed declines.
- In a home protection plan, there is no maturity benefit.
- In the tragic situation of the borrower’s death, the insurance provider pays the assured amount as a Death Benefit and terminates the policy.
What Are The Things to Know about Home Loan Insurance?
You need to remember some of the main factors to ensure that the policy you purchase covers your needs if you are about to buy insurance on your house loan. Usually, the insurance company is generally advertised by the lender’s relations officer, but some aspects should be known when opting for a home loan insurance policy.
Some of the points to check before buying home loan insurance.
Payment Method– The mode of payment is one of the checklists to take into consideration when purchasing the insurance. The payment of various insurance policies for home loans comes separately. It is typically paid in three separate forms –
- a) One-time premium payment
- b) Regular premium payment
- c) Limited premium payment.
Coverage – Insurance cover is a factor to consider when choosing a home loan or insurance policy. This is important because not all insurers a cover job loss, disability, illness, unforeseen event, etc. as some of their competitors.
Being aware of the insurance cover before choosing an insurance policy is essential. Insurance premiums may rise as a result of an increase in the coverage.
Tax Benefits –There are no tax benefits with Home loan insurance. Although, you can get tax benefits when you repay the home loan.
If you decide to pay your insurance premium in a single payment, your bank will pay that amount to the insurance company.
The same amount is distributed evenly in the EMI payment, but you will lose a significant tax advantage.
How Home Loan Insurance Benefits The Lender?
- Most lenders insist that borrowers buy HLPP to minimize risk. No lender wants to convert the loan into an NPA (Non Performing asset/bad loan). As the home loan insurance covers home loans, lenders can require borrowers to choose an insurance plan.
- The HLPP covers the risk of an NPA in the event of the death of the sole borrower, but borrowers can avoid HLPP if they have adequate life insurance.
- Keep in mind that insurance is a third-party product, and banks typically earn a commission on insurance sales, which provides a further incentive for the bank. So some lenders put pressure to earn such incentives.
How Home Loan Insurance Benefits The borrower?
- Home loan insurance provides cover to the outstanding amount of the home loan, ensuring that the borrower’s family will not have to evacuate the property if the borrower is unable to pay the EMIs. Most HLPPs cover disability or death of the sole borrower. This means that the insurance company will repay the loan if the sole borrower is unable to repay the loan due to a severe illness or job loss.
- Purchasing a home loan protection plan is very easy. The insurance contribution is added to the EMI amount, which is a minimal change to your EMI amount, and you can therefore purchase insurance without financial pressure.
What are the pitfalls?
Usually, the premium of home loan insurances is paid at one time and does not have a significant impact on the EMI. Generally, home loan borrowers take insurance as it reduces the financial pressure. These insurances are readily available, but you should consider specific points while you buy the product.
- No tax benefits on the premium amount
- No maturity benefit
- Home loan protection plans are costlier than general term insurances.
- The protection plan becomes null and void if you change your lender.
- Home loan protection plans do not cover death under natural reasons or suicide.
For home buyers, a home loan insurance plan is a must product for a home purchase, and taking it is always a significant financial burden. Lenders used to have liability insurance that limited your choices; it is essential to make objective decisions, rather than assume that the lender is offering the best product on the market. Buying a home loan protection plan can secure the repayment of your home loan when you’re not there.