[ecis2016.org] Does your home loan insurance plan cover the Coronavirus infection and would the insurer offer protection in case the borrower is not able to pay his home loan? We examine
Borrowers, while seeking a home loan, are often persuaded by lenders to opt for a combo deal that includes the home loan and a home loan insurance plan. The basic purpose of a home loan insurance plan, is to cover for unforeseen events, where the borrower is unable to service the home loan. One such example is the inability to pay the EMI, because of loss of income amid the Coronavirus pandemic. However, before we talk about the applicability of your home loan protection policy vis-à-vis the Coronavirus pandemic, let us first get a clear understanding of the product.
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Key features of home loan insurance
What is a home loan protection plan?
Like any other insurance policy, a home loan protection plan guarantees you and your family protection, in case of an unforeseen event such as loss of job, disability, critical illness or death. The insurer will settle the outstanding home loan amount with the bank, in case any of the above situations arise in the borrower’s life.
Do note here that a home loan insurance plan is an entirely different product from a home insurance plan. While a home insurance policy protects the borrower in case of any structural damages to the property in the event of man-made or natural calamities, a home loan insurance cover guarantees protection in case the borrower is unable to meet his liabilities, because of an unwanted situation.
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Banks that offer home loan insurance products
Most scheduled banks have insurance subsidiaries – for example, SBI has SBI Life, ICICI Bank’s ICICI Lombard, HDFC’s HDFC Life and HDFC Ergo, etc. Those who do not have subsidiaries, may have tie-ups with life and general insurers. As part of this tie-up, banks sell home loan protection plans of their insurance partners along with the home loans. Aside from the fact that they typically earn a commission on selling a package deal, the risks involved in lending long-term capital are also reduced through such insurance.
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Advantages of home loan insurance policies
- For banks: As it is, housing loans are secured loans – the bank will repossess your house and sell it to recover losses, if you fail to repay your loan. A home loan protection plan ensures that they do not actually have to engage in this time-consuming task and yet, recover their dues.
- For insurers: For the insurer, the profit lies in the fact that in most cases, they do not have to pay anything.
- For home loan borrowers: For buyers, home loan protection plans can come to their rescue, if something bad were to happen.
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Factors covered in home loan insurance plans
While most policies guarantee protection in case the borrower passes away during the loan tenure, because of unnatural causes, borrowers have to read the fine print of the policy documents, to understand what is covered under the plan. Not all home loan insurance plans offer you protection in case of job loss or critical illness or disability. While borrowers are given the option to opt for add-ons, they are asked to pay extra for every single unforeseen event they want covered under the policy.
Reducing cover plan and other types of home loan insurance
Even though level cover plans and hybrid cover plans are also available in the market, home loan insurance policies typically offer a reducing cover plan. This means that only the outstanding amount is covered, when the time to reap the benefits of a home loan insurance protection plan comes.
Say, you took a home loan of Rs 50 lakhs in 2015. Your outstanding liability in 2020 is Rs 45 lakhs. If you were to use the cover because of an unforeseen event now, the banks will settle the loan of Rs 45 lakhs directly with your insurer. Although the plan initially covered the entire amount, it will decrease in proportion to your home loan. By the time the loan is fully repaid, the cover also disappears. At the end of the term, if the borrower is alive beyond the term of the policy, he does not get back the premium paid.
Also, if you transfer your home loan to another bank, the plan will become null and void. The same is true, if the borrower dies of natural causes or commits suicide.
As is true of any insurance policy, you have to pay a premium to buy a home loan protection plan. While underwriting the cover, insurers take into account your age, loan amount, loan tenure, interest rate and medical history, to charge the premium. As you are already taking a home loan and may be hard pressed for money, banks make it convenient for you to buy the home loan protection plan, by lending the premium amount to you, as part of the home loan amount. You will then have to pay an interest on the combined amount.
A borrower, who can arrange the home loan insurance premium amount on his own, stands to benefit in two ways. First, they will not have to pay interest on a higher loan amount. Second, they can claim tax deductions on the premium under Section 80C and Section 10(10D) of the income tax law. In case the bank lends the premium amount, the whole amount becomes part of the EMI and no separate deductions are available.
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The borrower is generally asked to pay the premium as a one-time lump sum amount. This is an area where some problems can arise. A one-time payment means, you will not be able to increase the loan tenure because of any emergency. The same holds true if you switch lenders. A one-time payment means if you pre-pay your loan, there will be no refund, on the insurance premium. Additionally, you lose the interest on this advance premium you have paid.
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Even if you have to pay a little extra, opt for a home loan protection plan that gives you the freedom to pay the premium at intervals.
Is it compulsory to buy home loan insurance?
Whether or not you buy a home loan insurance policy is up to you. Insurance regulator IRDAI has repeatedly stated that banks cannot deny a borrower a home loan, because they refuse to take a package deal.
As the COVID-19 pandemic exacts extraordinary human and monetary costs, there have been rising concerns about insurance policies. How helpful are insurance policies for a family that has lost its sole earning member to the pandemic that has, as on May 27, 2020, claimed 3,52,604 lives worldwide. Do home loan insurance plans cover the Coronavirus infection and would the insurer cover the risk, in cases where the borrower is not able to pay his home loan?
There are several scenarios, where the borrower and his family may have to look at the home loan insurance plan:
In case the borrower passes away: As all policies cover the untimely death of the borrower, the insurer will settle the outstanding loan.
In case the borrower loses his income: Not all policies cover this unforeseen event. Unless the policy document mentions this as covered, the insurance may not be of help.
In case the borrower is infected by Corona: Policies that cover critical illness will offer relief in such a situation. Again, unless the policy document mentions this as covered, the insurance may not be of help.
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Home loan insurance versus term insurance
A term plan, like a home insurance plan, provides cover in case of the sudden death of the insured during the policy term and not if the policyholder survives the plan. The coverage amount received from the term insurance policy, can be used for meeting any kind of financial requirement, which isn’t true in case of home loan protection policies.
| Home loan insurance | Term insurance |
| Sum insured is paid to the nominee. | Outstanding liability is settled with banks. |
| Mostly involves a one-time payment. | Regular payment plan. |
| Wide difference in products. | Mostly similar products. |
| Comparatively costly. | Comparatively affordable. |
| Most home loan insurance policies provide a reducing cover. | Most term plans provide fixed cover. |
| Tax benefits under Section 80C but conditions apply. | Tax benefits under Section 80C. |
FAQs
Is it compulsory to take insurance with a home loan?
No, the RBI and the IRDAI have made several statements in this regard.
Does home insurance get tax benefit?
In case the premium is paid by the borrower, they are eligible for tax deduction under Section 80C and Section 10(10D).
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