When applying for a Home Loan, most banks require borrowers to purchase Home Loan Insurance as well. Let us tell you all about Home Loan Protection Plans.
What is Home Loan Protection?
In simple words, a Home Loan Protection Plan is an Insurance cover for your Home Loan.
How does it help borrowers?
A Home Loan Protection Plan indemnifies a borrower’s family against the liability of the Loan in case of the borrower’s demise.
Additional Reading: Understanding Home Loan Insurance
Who covers the loan, then?
The Insurance company will pay out any outstanding dues on the Home Loan to the lender.
So, with Home Loan Insurance, you don’t need to worry about your family having to vacate the house due to non-payment of the Home Loan dues.
But remember, a Home Loan Protection Plan is not the same as Home Insurance.
Additional Reading: Insurance Protection For Home Loans
What’s the difference?
Home Insurance offers you cover against damage from natural disasters, fire, storms and theft, among others scenarios.
A Home Loan Protection Plan however, is a safeguard against non-repayment of your Home Loan. In case of the borrower’s demise during the tenure of the loan, the Home Loan Insurance provider will be responsible for clearing the loan dues with the Home Loan lender.
Additional Reading: Pick The Best Home Loan Repayment Option
Three types of Home Loan Protection Plans
There are three different types of Home Loan Protection Plans.
- Reducing cover: In a plan with reducing cover, the life cover offered gradually reduces, like the outstanding principal amount on the loan.
- Level cover: This is a fixed cover Home Loan Insurance plan. The life cover provided in the policy remains fixed for the entire tenure of the Insurance plan.
- Fixed cover for one year followed by reducing cover for the remaining tenure
Under the level cover plan option, the Insurance provider takes on a higher level of risk. This means that the premium payable for the level cover is usually higher.
Generally, Home Loan insurance plans offer a reducing cover option. Some Insurance plans also offer optional riders like job loss, disability, accidental death or critical illness. A job loss rider will cover upto 3 EMIs of your Home Loan. These riders are available on the payment of an additional premium.
Additional Reading: Your Guide To Accidental Death And Disability Riders
Paying premiums on Home Loan Protection Plans
A Home Loan Protection Plan is generally a single premium policy. You can also get plan variants that allow you to pay regular premiums or make limited premium payments.
Sounds confusing?
A regular premium policy has a premium payment term that extends through the term of the Insurance policy.
A limited premium policy has a premium payment term that is lesser than the tenure of the Insurance policy.
Additional Reading: Bought Property? Deposit TDS Or Get A Tax Notice
Home Loan Protection Plans v Regular Life Insurance Plans
Home Loan Insurance plans are usually offered together with Home Loans from banks. Therefore, you cannot choose a Home Loan Insurance plan based on your own financial requirements.
After the Home Loan is settled by the Insurance provider, any excess funds are paid to the borrower’s nominee.
Additional Reading: Important Tips On Buying A Home
Benefits of Home Loan Protection Plans
- Your loved ones are not burdened with the repayment of the Home Loan in case of your demise.
- The borrower can claim tax benefits under Section 80C of the Income Tax Act.
- You can choose to supplement your Home Loan Insurance plan with riders to cover any eventuality, such as accidental death or critical illness among other contingencies. Be prepared for a higher premium on the policy though.
Additional Reading: Tax Benefits From A Joint Home Loan
Disadvantages of Home Loan Protection Plans
Home Loan Insurance plans are expensive as compared to regular Term Life Insurance plans.
If you opt for a single premium Insurance policy, the Home Loan Insurance premium is added to the Home Loan amount by the lender. In this case, you will not be able to claim tax benefits under Section 80C of the Income Tax Act because the bank has paid the premium for the policy.
However, some Home Loan Insurance plans will provide a separate receipt for the payment of premiums for a period of 5 years. This will allow you to claim tax benefits for a single premium policy.
Let’s give you an example. Say a single premium amount of Rs. 1,50,000 was included in your Home Loan amount. You will get premium payment receipts of Rs. 30,000 for the first 5 years.
If you prepay your Home Loan, there is a chance that you might lose either the full premium amount paid or part of the paid amount. Some Home Loan Insurance plans terminate the coverage without returning any of the premium amounts paid.
Additional Reading: How To Plan Home Loan Prepayment
Now that’s what you need to know about Home Loan Insurance. Think you’re ready for that Home Loan?
Additional Reading: Home Loan Handbook