Home loan insurance (or mortgage insurance as it also known) is increasingly becoming important due to the zooming property prices and increased unpredictability in our lives. Getting home loan insurance is important for not only the borrower but also for the bank.
Let us explore home loan insurance from the perspective of both the borrower and the lender and why it is important.
Why it is important for the lender
The obvious answer to this would be to protect their interest which means they will not want the loan to become a bad debt. If the borrower passes away then obviously the bank will have a lot to lose especially if that person was the primary (or sole) earning member.
However this is not the only reason; as often experts feel that separate home loan insurance is not required as long as the borrower has sufficient life coverage. A good term plan meets all these requirements.
One thing to watch out for though: Since it’s a third party product, the banks will usually earn commission on this which acts as another incentive for the bank to sell it to the customer. That’s great for them but it may be not so great for the customer. Let’s look at why the customer should opt for it.
Why it is important for the borrower
In the simplest of terms home loan insurance is a plan that covers the outstanding debt (home loan). It is a way to keep the monthly payments being paid in case the borrower passes away or is unable to make the payment due to loss of job or disability.
You could choose a simple no-frills plan or go for one that has riders and additional features. Though right now we are focusing on loan protection plans for your home, you can also buy them for personal and auto loans too (although these are not very common).
This ensures that in case of death the dependents are not left homeless. Finding a replacement for the home that one lives in can be a challenging, as the cost would have zoomed in the interval between buying the house and the time one is forced to look for a replacement.
Also in the case of a job loss or an accident one may not be able to meet his EMI commitments for some time. It would be unfortunate to lose your house at such a time. Insurance plans protect you from such an possibility. So whether you buy from the lending bank or buy one on your own, getting home loan insurance is still advisable.
Aspects to consider before choosing home loan insurance
There are two ways to insure your home loan:
- A term insurance plan (that is bought keeping in mind your debts and liabilities), or
- A separate home insurance (that addresses ONLY your home)
Most home loan insurance plans provide a reducing coverage. What does that mean?
The coverage size is linked to your outstanding loan amount and therefore the sum insured reduces (along with the payment) as one repays the loan but in a term insurance the coverage remains fixed. Also, in the case of a term plan the amount is paid to the nominee who can pay the lender and settle the loan. In a home loan insurance plan the insurer pays directly to the lender and settles the loan.
One can choose to buy home loan insurance from either a life insurance or a general insurance company. While the policies sold by life insurance companies are for long term those by general insurance must be renewed annually.
Do ask about additional riders; it makes sense to have insurance that covers disability and unemployment. Make sure to check also whether only natural death or accidental death is also covered.
The insurance period should match the loan period; do not opt for a shorter period coverage thinking that you will extend later. There are two problems in this:
- There is strong possibility of you forgetting to do so down the line, and
- As your age progresses your insurance coverage gets more difficult to find and more expensive to buy.
When buying a protection plan especially so if you are buying it from the loan provider, be sure that it matches your needs. Each loan provider will have a specific tie-in with a third party insurance provider so they will offer you a product only from the company they have that tie-in with; this limits your choices.
Not only should you consider your requirements carefully but also compare it with the other products in the market. Do not assume that what your bank offers is the best and also do not assume that they are out there to cheat you. Compare and decide objectively.
Before you decide to bundle up your insurance payment with your EMI think ahead. In case you want to switch your loan to another loan provider, transferring the insurance also may prove to be a little challenging.
As mentioned earlier having a protection plan for your debt is important. There is no rule-of-thumb which says that one should buy pure home loan insurance or opt for a term policy. Each has its own benefits but you should definitely look at both the options and weigh their benefits/drawbacks before zeroing in on one.