Understanding Home Loan Insurance

By BankBazaar | June 14, 2017

Understanding Home Loan Insurance

Anyone who has approached a bank or a Non-Banking Financial Company (NBFC) to avail a Home Loan would have more often than not come across an insurance executive who cross-sells Home Loan Insurance. Some banks have also made Home Loan insurance mandatory.

But, many customers still think it isn’t really required and tend to treat it as a simple product promotion by the bank. If you are one among them you need to read this article.

If your Home Loan EMIs are deducted from your monthly salary, you may not regard it as a financial burden. However, that doesn’t mean you are free from obligations. Have you ever wondered what would happen if you are unable to pay back your EMIs?

Unforeseen situations like loss of job or mishaps can happen to anyone, and it is your duty to safeguard yourself as well as your family from financial liabilities in such situations. This is exactly why Home Loan Insurance should be seriously considered.

Additional Reading: Should You Opt For A Home Loan Insurance Cover?

So, what is Home Loan Insurance?

Insurance, as we all know, is a form of risk management in case of sudden loss. Home Loan Insurance, as the name suggests, is an insurance plan intended to mitigate the risks associated with your Home Loan, which is a long-term financial burden.

How does it work?

Home Loan Insurance works in a similar way to Life Insurance. The insurance company protects the insured by taking away his/her Home Loan liability in case of his/her loss of life or permanent disability.

The insurance company pays off the outstanding balance of the loan amount to the bank in such situations and thereby protects your family members from the burden of the loan. The sum assured here will not be a fixed amount. Instead, it will be the outstanding balance of the loan amount.

Additional Reading: Insurance Protection For Home Loans

How can I avail Home Loan Insurance?

You can avail Home Loan Insurance along with your Home Loan disbursement. The premium payable will be added to the loan amount and the bank disburses this amount to the insurance company as a single instalment along with the loan disbursement. The bank, in turn, splits this amount into small monthly instalments, which will be added to the loan EMI.

For example, if your Home Loan is for Rs. 18 lakhs and the insurance premium is Rs. 2 lakhs, the bank pays the premium amount upfront to the insurance company. Your loan amount would then show as Rs. 20 lakhs, out of which the EMI over the loan tenure will be split towards your loan account as well as insurance account.  In effect, you will be paying interest for the premium amount also.

Will Home Loan Insurance affect my loan eligibility?

If you are interested in availing Home Insurance you can mark the option in your Home Loan application so that the bank will sanction the applied loan amount along with the insurance amount, subject to LTV and standard eligibility criteria.

If you are availing the maximum possible loan amount as per your income and want to avail Home Loan Insurance as well, the bank will reduce the loan amount after including the insurance amount. However, some banks like SBI have made Home Loan Insurance mandatory, so they calculate the loan eligibility with the insurance premium instalment included.

How premiums are calculated?

The premium amount varies according to the age of the borrower, loan tenure and availed amount. Premiums usually increase with the age of the borrower as there is more risk involved. The higher the loan tenure, the higher the premium.

Most insurance companies have made health check-ups mandatory for borrowers above 40 years of age. The borrower’s health condition is also a factor in deciding the premium. For example, if you are above 40 years and had a heart attack recently, the premium you will have to pay will be slightly higher than a healthy borrower of your age.

Additional Reading: Home Loan Interest Rates

Is there any age limit for availing Home Loan Insurance?

As long as you are eligible for a Home Loan, you are eligible for Home Loan Insurance too. However, some insurance companies have marked an age limit varying from 50-60 years for the expiry of the policy.

Will there be a limit for sum insured?

Usually, insurance companies cover your entire loan amount. But in some cases, there could be a limit. The sum insured usually reduces along with the reducing loan outstanding balance, but some insurance companies offer a flat sum insured instead of on a reducing basis.

In such cases, a fixed amount will be paid to the beneficiary in case of an unforeseen incident, irrespective of the outstanding balance of the loan.

But usually, Home Loan Insurance policies, unlike term policies, will not pay the sum insured if the borrower is alive beyond the term of the policy.

Additional Reading: How Home Insurance Can Keep You From Going Crackers During Diwali

How are the claims processed? And what’s covered in Home Loan Insurance?

Home Loan Insurance usually covers death of the borrower (insured) and permanent physical disability in case of accident or illness, like paralysis. However, some companies cover loss of job for a short period ranging from 1-12 months under special conditions.

In the case of death or permanent illness of the borrower, his / her family members need to file a claim producing documents like a written application, death certificate, medical reports etc. On approving the claim, the insurance company directly pays the amount to the bank or to the family member nominee.

Additional Reading: Your Online Home Loan Toolkit

An insurance on your Home Loan will protect your family members in case of unfortunate events. If you’re worried about your health in general, check out some of these insurance plans on offer.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.
Category: Home Loans

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