A home loan requires a lengthy commitment. Home loans can last for up to 25 to 30 years or longer. We are all aware that there are no guarantee cards in life. Imagine a scenario where the person who makes the monthly or quarterly EMI payment passes away due to an unforeseeable event. Therefore, the dependent family members are responsible for repaying the loan. The residence or the collateral may be taken in the event that the loan is not returned and the instalments are not made on time.

In any of these scenarios, an asset that is valuable to the family or that can be used in times of need may be seized owing to non-repayment of the loan's outstanding balance. In order to safeguard your family and loved ones in times like these, you must plan ahead. Home loan insurance is now necessary, significant, and even, one could say, crucial because of this!

What is home loan insurance?

Simply put, Home Loan Protection Plan (HLPP), often known as Home Loan Insurance, is a type of insurance plan. which specifies that, in the event of the borrower's death, the insurance company will pay the remaining balance of the mortgage to banks, NBFCs, or housing finance firms. Typically, the loan tenure and the policy term are same. By obtaining home loan insurance, the borrower is comforted that even in the event of his or her passing, the borrower's family won't be required to pay back the mortgage or leave the property due to default on the loan.

Difference between Home Loan Insurance and Home Insurance

House insurance and home loan insurance are frequently misconstrued by consumers. These two concepts are wholly distinct from one another and have very different meanings.

Your home is protected by your insurance against the following risks:

  • Home or property damage brought on by thievery.
  • Damage from tragedies caused by nature, such as earthquakes, storms, floods, and fires.
  • Accordingly, home insurance is the type of insurance that pays for your home's replacement cost in the event of damage. Home loan insurance, however, protects the loan you accept to purchase a home. Only the outstanding loan burden as of the time it was brought is covered by this plan.

The majority of lenders now require homeowners insurance. Home loan insurance, on the other hand, is not required and is entirely up to the borrower or applicant for the loan.

Why Do Lenders Need Home Loan Insurance?

Lenders do not appreciate it when their loans end up being bad debts. Of course they would want to keep their cash safe. Lenders require home loan insurance to prevent a loan from becoming a very bad debt. If the borrower passes away, the lender will suffer a significant financial loss, especially if they were the family's only source of income. As a result, mortgage loan insurance is perfect for lenders.

Why Do Borrowers Need Home Loan Insurance?

As is already known, in the event that a borrower defaults on their obligations, a house loan insurance plan will pay the balance of the home loan. The sad passing of the borrower could lead to such a circumstance. Home loan insurance is crucial for borrowers since it assures that their dependents won't become homeless while they are away or in an emergency.

How does Home Loan Insurance Work?

Term insurance and home loan insurance are alike. You are protected by this insurance up until the time when you must pay back the loan. The insurance period ends when the remaining loan balance is repaid. However, the family can use the loan insurance to pay off the outstanding balance of the home loan if the person making the loan payments passes away during the loan term. This prevents the bank from taking the house or the other possessions used as collateral.

Payment of Premium

The majority of home loan protection policies allow for a single premium payment. The option for buyers to combine the premium payment with the overall loan amount is also available. For instance, the buyer has the option of taking out a loan for Rs 52 Lakhs if the premium amount on a Rs 2 Lakhs loan is Rs 50 Lakhs. They may include the premium in the EMI while paying off the outstanding loan balance through EMIs.

Riders and add-on benefits

To improve their cover benefits, a few of house loan insurance companies also provide home loan insurance policies with optional rider plans. Home loan protection insurance can be combined with riders for critical or terminal illnesses, accidental deaths, unemployment, and disabilities.

Types of Insurance Cover for a Home Loan

There are three different forms of insurance coverage available for mortgages: level, hybrid, and decreasing. Based on the insurance coverages described below, these three types vary:

  1. The Level Cover Plan - It is a basic insurance policy, and the premiums paid for the house loan insurance and coverage stay the same for the course of the policy.
  2. The Hybrid Cover Plan - According to this house loan insurance plan, the coverage is fully in effect for the first year before the remaining balance shortens the term.
  3. The Reducing Cover Plan - In the event of a decreasing cover plan, as the duration draws to a close, the coverage is reduced along with the loan balance.

What are the key features of Home Loan Insurance plans?

Before choosing a house loan insurance plan, it is advisable to be aware of its aspects. Here are some of them:

  1. One-time Payment - When purchasing insurance against home loans, there is just a single premium that needs to be paid, not a series of them. Home loan insurance premiums, however, are paid in line with the EMIs. As a result, the premium amount is paid in equal monthly instalments as the main loan amount.
  2. Consequences for Bank Transfers - The effects of house loan insurances may vary in the case of home loan balance transfers. The new lender may occasionally want a different house loan protection plan or may feel at ease with the current one. With the balance transfer, the house loan insurance could also expire, and the insurer might want you to start your insurance plans from scratch. Therefore, one should be careful to restructure the home loan insurance coverage in the event of balance transfers.
  3. Joint Home Loan Borrowers are Covered - In the case of combined house loans, home loan insurance is available to all borrowers. The insurance coverage does in fact apply to all co-applicants in the case of joint loans.

What are the main benefits of home loan protection plans?

Home loan protection programmes come with a number of advantages. These consist of:

  1. Security Cover - The main advantage of a home loan insurance policy is that it gives both the lender and the borrower security protection. You are shielded from a large obligation in times of financial difficulty, saving the lender from suffering damages.
  2. Tax Benefits - By paying a premium for home loan insurance, borrowers receive tax benefits comparable to those provided by a loan. You may, however, be eligible for tax benefits under Sections 80C and 80D of the Income Tax Act.
  3. Easy and Flexibility - Home loan insurance rates are typically very expensive. However, lenders most frequently combine the premium payment with the regular EMIs in order to make things simple for you. As a result, just like the borrowed principal, the premium is also paid in instalments, which is handy for those who are taking out a home loan.
  4. Included with Add-Ons - When it comes to improving the cover benefits, housing loan insurance policies tend to be highly broad. For instance, house loan insurance offers protection for a variety of scenarios, such as sickness, unexpected deaths, or unemployment. Suicides, however, are not covered by the house loan insurance programme. Choosing term insurance for home loans will provide additional benefits.

Things to Be Kept in Mind before Buying a Home Loan Insurance Policy

The following things must be kept in mind before buying a home loan insurance policy:

  • Both general insurance companies and life insurance companies offer house loan insurance that a borrower can acquire.
  • The premiums for policies provided by general insurance firms are lower and must be renewed annually.
  • At a slightly higher cost, life insurance company policies offer coverage for a longer period of time.
  • In the event that you later move your mortgage to another lender, make sure your home loan insurance is in accordance with the new lender's guidelines or restructure it to prevent policy lapse.
  • The current home loan insurance payment will not be sufficient to cover the loan amount if the loan term is extended as a result of a rise in interest rates.
  • A portion of the total price for home loan insurance is lost if a mortgage is paid off early. Instead of a single premium insurance, think about a policy that is renewed annually to prevent this.
  • Home loan insurance should not be confused with home insurance. The latter safeguards both your house and its belongings.

A property purchase is a significant and long-term investment, and nobody can know what will happen in 20 to 30 years. It is wise to be ready for an unpredictable future as a result. Despite the fact that it may not be required by law, you should get home loan insurance to safeguard your family and investment. You can easily obtain a plan from your lending bank in combination with the mortgage, or you can shop around to discover the finest plan for you. Additionally, by purchasing home insurance, you can defend your house and its contents against calamities like fire, theft, etc.