Living under the roof of “own home” has always been the biggest dream of every middle class family. It’s one of the biggest investments of anyone’s life too. The day we get possession of our home, remains unforgettable throughout our lives.
Most of us need to take a home loan to pursue our dream homes. Since it’s the most valuable property of our lives from the emotional and needs perspective as well; it must be protected by some financial tool ensuring it would always be there with our loved-ones even after should something unfortunate happen to us.
When you sign a home loan documents, you also sign on the documents putting your dream home on mortgage with the lending financial institution. Legally, the ownership of your home will be with the lender as it has paid you the amount to purchase the home. It continues to stay with the lending institution till you fully clear the loan.
You, being the only bread-winner for your family, would definitely wish that your dream home would always stay with your loved-ones. For that motive, you must buy a financial product.
Normally, the lending financial institution will ask you to buy home loan insurance (also called home loan protection plan (HLPP)) from any of the insurers it has a tie-up. But does it make sense? I would say “NO”. Here we would know how:
Basic purpose of a home loan insurance or home loan protection plan (HLPP)
It is a single premium insurance plan that covers the outstanding home loan amount at given point of time. For example, you have taken a home loan say Rs 30 lacs for period of 25 years and also taken a home loan insurance plan to cover your home loan liability. God forbids, should something happen to you after few years say 3 years, the outstanding home loan amount, assuming Rs. 28 lacs would be paid by the insurance company to the lending bank, avoiding bank acquiring your dream home.
Despite that, I would not suggest you to buy a home loan insurance plan. You should opt a term insurance plan for same amount instead. I am trying to explain – why?
1. Home loan insurance plan covers for a limited period.
Generally, a home loan insurance plan provides cover for 5 years only and not for the entire loan tenure. It needs to be renewed after every 5 years, while a pure term insurance plan is valid for the entire life of the borrower or for the period opted.
2. A home loan insurance plan is costlier than a pure term insurance plan.
The premium paid for a home loan insurance policy is much higher than the premium charged for a pure term insurance policy for the same amount. However, the premium rates vary depending on the age and insurance company, the premium for a home loan insurance policy is normally 2 to 2.5 times higher than the premium charged for a pure term insurance policy.
3. Home loan insurance plan is a single premium policy
For most home loan insurance plan (except one plan of ICICI Lombard) insurers charge premium as a single pay which leads to increase total home loan amount. In case of Rs. 30 lacs home loan amount, the one-time premium for home loan insurance for the tenure of 5 years, about Rs. 1 lac will be added to the principal amount increasing it to Rs. 31 lacs. Now, your EMI (Equated Monthly Installment) will be calculated on Rs. 31 lacs, not on Rs. 30 lacs, and you’ll be paying interest on the premium of home loan insurance too.
4. A home loan insurance plan does not cover suicide or death under natural reasons.
This clause is one of the biggest disadvantages of a home loan insurance plan. Insurers, under home loan insurance policy minimize their risks as natural death is defined as death caused by illness or internal malfunction of the body e.g. heart attack, death due to some complications like infection etc.
Whereas a pure term insurance policy covers natural death and even suicide if committed after 1 year of policy commencement.
5. A home loan insurance policy becomes invalid if home loan is transferred new bank.
As the bank regulator, the Reserve Bank of India has abolished prepayment penalty, many borrowers are shifting their home loans to financial institutions offering lower interest rates. But switching lender will lead to expiration of your home loan insurance policy without refunding premium paid. You’ll need to buy a new home loan insurance policy to cover outstanding home loan amount.
6. Home loan insurance policy becomes null & void if you foreclose the loan.
According a research, on an average all home loans are closed within 7 to 8 years, about 30 per cent of loans are closed within 5 years because of increasing income levels. In such cases, you’ll not get any refund of premium and the policy will become null and void.