Due to the increasing property prices, home loan insurance is gaining popularity today. Since the events in our lives these days are highly unpredictable, most people tend to secure their future and the future of their loved ones with the help of home loan insurance. As there's always a fear in the borrower's mind that if something unexpected happens to him/her in the near future, who will repay the balance home loan amount. Certainly, a borrower will not want the burden of a home loan to fall on the family after his/her death; therefore, home loan insurance was introduced.
However, purchasing a home loan insurance is not compulsory when taking any loan from the lenders, including banks, housing finance companies, or NBFCs. As per regulatory bodies like RBI and IRDA, it is not mandatory to buy a home insurance plan if the borrower is taking a home loan from any financial institution.
This was just a brief on the topic. Let's move ahead and learn everything about home loan insurance in detail.
What is Home Loan Insurance?
Home loan insurance, also known as Home Loan Protection Plan (HLPP), is a scheme provided by almost every financial institution in which the insurer will settle the balance or outstanding home loan amount of the borrower with the lender or bank if there is a scenario of unforeseen circumstances that might involve the demise of the borrower.
In simple terms, Home Loan Protection Plan can be called an insurance plan under which the insurance company settles the balance amount of a home loan with housing finance companies or banks in case of a borrower's death. The policy term is generally the same as that of the loan tenure. By availing of home loan insurance, you as a borrower are relieved that even after your death, your family will not be questioned or asked to repay the home loan or vacate the house because of non-payment of the loan amount.
Kinds of Home Loan Insurance
Lenders generally offer three types of home loan insurance to the borrowers that include Level Plan, Reducing Cover Plan, and Hybrid Plan, which is further discussed below:
1. Level Cover Plan
Under this cover plan, the coverage remains uncharged for the insured throughout the loan tenure.
2. Reducing Cover Plan
Both the outstanding loan and the coverage reduces with the tenure.
3. Hybrid Cover Plan
The coverage under this plan remains full during the first year. It starts declining as the balance amount reduces with tenure.
Features and Advantages of Home Loan Insurance
Following are the features and advantages of home loan insurance:
1. Home loan insurance offers a lump sum amount benefit that can be used further to repay the outstanding home loan.
2. Lump sum amount is paid to the beneficiary of the policyholder or home loan.
3. Policy can lapse in case of a home loan balance transfer, full repayment of the loan amount, or home loan restructuring.
4. Under Section 80C and 80D, the borrower gets the tax advantages from the home loan.
5. Under a joint loan, a single home loan insurance policy can cover all the borrowers.
6. Borrowers can convert insurance premiums into the amount that can be added to the home loan EMIs.
7. Home loan insurance policy does not cover the death of the borrower due to natural calamities or war, or suicide.
8. Home loan insurance offers coverage for certain medical illnesses involving cancer, heart attack, etc.
Importance of Home Loan Insurance
1. For Lenders
Lenders of a home loan or any other loan dislike it as it is very unprofitable when their loans become bad debts. Lenders of home loans require home loan insurance in order to prevent a home loan from becoming a debt. If the loan borrower dies, the lender will lose a significant amount of money, especially if the borrower was the only income source of the family.
2. For Borrowers
House loan insurance or mortgage insurance, as we all know, safeguards and protects the outstanding home loan amount if the borrower fails on his/her obligations. A scenario like this can emerge due to the borrower's employment insecurity or untimely death. As a house loan insurance buyer, you can opt between a standard base plan with extra features and riders for more extensive coverage. Insurance against house loans is crucial for the borrowers since it assures that the dependents of the borrowers do not become homeless after the borrower's death.
Frequently Asked Questions (FAQs)
1. How does house loan insurance work?
This type of insurance protects you against the risk of defaulting on your house loan. As a borrower, you will be charged with a premium based on your age, loan amount, and loan term. You also have the option of paying it all at once or combining it with your EMI payments.
2. What are the benefits of home loan insurance?
The two main benefits of home loan insurance are tax advantages and peace of mind.
3. Is there a tax benefit for home loan insurance?
Yes, there's a tax benefit for house loan insurance. If the borrower pays the premium himself/herself, he/she is qualified for a tax deduction under Section 80C and 10 of the Internal Revenue Code (10D). The highest tax advantage amount that can be claimed under Section 80C is Rs. 1.5 lakhs.
Also read: Top 10 FAQs on Home Loans in India