Don’t Buy Home Loan Insurance Plans or Home Loan Protection Plans
Home Loan Insurance Plans- A few months back when one of my friends came to know that he was paying a higher interest rate on his home loans as compared to others, he decided to switch over his outstanding loan amount to SBI home loan due to 0.75% lower interest rate than his existing home loan interest rate. He seemed very much happy for this home loan transfer and thought that he took really a prudent decision.
But his happiness did not last for a very long time when he came to know that his old home loan insurance plan got expired due to this loan transfer. Also, SBI home loan sold him another home loan insurance plans for a hefty premium amount with a single premium and valid for 5 years term with his Rs.25 Lakh home loan transfer for 15 years.
Buying a house or flat bears some impulsive values in India. Yes, it is indeed a dream for many of us. Therefore, while taking a loan to purchase a home, we need to be cautious regarding the imposition of home loan insurance plans or home loan protection plan (HLPP) by the lenders. Today, I would discuss 5 best reasons why you should not buy Home Loan Insurance Plans or Home Loan Protection Plans. My questions to the lenders are?
- Are home loans insurance plans worth buying while taking a home loan?
- Does a borrower deserve losing an existing home loan insurance plan while transferring his home loans to a new lender for getting best interest rate?
- Can a lender forcefully sell me a home loan insurance plan at the time of taking a home loan?
- If you have to secure your home loan at any cost, why don’t you sell us a Term Insurance Plan, which is more cost-effective?
- Does taking an HLIP or HLPP relieve us from mortgaging our property to the lenders?
What is Home Loan Insurance or Home Loan Protection Plan?
Let’s first understand what is a home loan insurance. You can see from the term itself that this is insurance for protecting your home loan. This simply means that in order to secure their outstanding loan amount, the lenders of home loan impose a loan protection plan on the borrowers. In case of unprecedented demise of the borrower, the lenders would receive their outstanding loan amount from the insurance company.
Take note that, the borrower has to bear the cost of loan insurance and not the lender. What a fallacy? Did you ever hear that for taking:
- insurance for your life, the insurance premium is being paid by the life insurance company itself?
- home insurance against the natural calamities, the insurance company is bearing the cost?
The answer is a No, never. Then why the lenders are charging us for securing their own property (Home Loan)? Moreover, this HLPP is restricted to our home loan balance only and it doesn’t cover the entire loan tenure. As per the regulatory guidelines, a lender can not sell or impose insurance forcefully to the borrowers. But it can not be impugned that the lenders do not promote insurance by forcefully selling them for the interests of their sister or parent companies.
What are the drawbacks of Home Loan Insurance Plans against Term Life Insurance Plans?
- The cost of home loan insurance is much higher than that of the Term Insurance Plans;
- This HLIP or HLPP is restricted only to the outstanding loan amount only. This benefits only the lender and not the borrower;
- This insurance policy does not cover the entire tenure of the home loan. Generally, it is issued for 2/3 rd of the entire home loan tenure(If loan tenure is 15 years, the policy will remain valid only for 10years);
- The home loan insurance gets canceled automatically when the home loan is transferred to the new lender;
- Lenders do add the single premium cost of HLIP with the loan amount. This increases your loan emis and you have to pay additional interest on this insurance premium as well;
- HLIP does not provide life cover. It only secures the loan sanctioned amount;
- Most surprisingly, this insurance does not provide coverage for death due to suicide or natural reasons.
- Insurance coverage under this policy gets reduced with the passage of time as the loan EMIs are being paid periodically.
- In case of single premium policy, you will not get any income tax benefits under Section 80C since you have not paid the premium amount upfront but has included this with your loan amount. (The premium amount has been paid by the bank upfront to policy issuing company)
What are the 5 best reasons for not buying the Home Loan Insurance Plans?
On the basis of the following 5 points, the comparative analysis is being done for arriving at the conclusion.
1. Cost of Home Loan Insurance Plans
Cost of home loan protection plan(HLPP) is much expensive than the plain vanilla term insurance. Usually, the HLPP premium cost is 3 to 4 times higher in comparison to term insurance. As I mentioned earlier that the onus of protecting a property should lie with the owners only. But unfortunately, the lenders make us bound to take this policy for availing the home loan as this comes bundled along with the home loan. But instead of providing us a much cheaper term life insurance, they just increase our cost of loans by adding the premium cost with the loan amount.
Plain vanilla term life insurance is indeed a cost-effective insurance solution for us and if we already have this policy, how can banks impose us this HLIP or HLPP forcefully along with taking the mortgage of the property.
Generally, the premium cost of this home loan insurance ranges between 3% to 5% of the loan amount. Not only, this enhances our loan amount but also it increases our interest payment on the total loan amount. Now, think if you have taken a home loan for Rs. 25 Lakhs for 20 years, the single premium is likely to be around Rs.1 lakh. This amount of premium is not fixed and varies with your loan amount and your age profile. Also, it might be much higher if opted for both the lives of the borrowers in case of joint loans with your spouse. Therefore, this loan protection plan fails miserably in terms of cost-benefit analysis.
But the premium for online ICICI Home Loan Insurance term plan for Rs.25 Lakh for 20 years comes out to be Rs. 5250 annually. But this is not a single premium plan and you have the option to pay the amount over the loan term, which would be a pocket-friendly option for you. Also, you can save tax up to Rs.54,600 annually u/s 80C. This ICICI Home Loan Protection Plan insurance premium is much cheaper as this policy is a standalone policy and not bundled with the home loan. Below you can see two sample illustrations for easy understanding.
2. The validity of Home Loan Insurance Plans
The validity of a loan protection plan ends up as soon as the loan is repaid or the borrower dies. The main irony is that this insurance does not cover the whole loan tenure. Usually, it covers 2/3rd of the home loan tenure. So, if you repay your 10 years loan in just 5 years, your HLPP will get cancelled at full loan repayment. This policy is beneficial for the lenders and not borrowers undoubtedly. Recently, it is also being seen that banks are allowing this insurance policy up to the loan tenure and the whole single premium amount is added with the loan amount. In that case, you are deprived of getting income tax deduction u/s 80C.
In most of the cases, these insurance plans are the reducing balance in nature and therefore the life cover keeps going down as the loan gets repaid periodically. So, from a financial point of view, this insurance is not suitable for the borrowers, unlike the term life insurance policy where the policy coverage is the same up to the policy tenure.
3. Switchover of Home Loan to new Lender
Ideally, if your existing home loan interest is higher by 100 basis points or 1% from other lenders available in the market, you should definitely switch over your loan to the new lender. But if you switch over your loan, the existing home loan protection plan would get cancelled immediately. As this is for protecting your lender’s business and not yours. Will you call this a justified one? I don’t think so.
Therefore, had you ben opted for a term insurance plan it would have given you the coverage until your death or the policy tenure whichever is earlier.
4. Life coverage
As the name of this insurance policy is Home Loan Insurance Policy or Home Loan Protection Plan, for obvious reasons, this policy does not provide coverage for your life. Ler’s say your outstanding loan balance is Rs. 15 Lakh. If you have bought a term life insurance for Rs. 50 Lakh, after your demise your family would get the sum assured amount of Rs. 50 Lakh and using that amount your family would repay the outstanding loans of Rs. 15 Lakh. This would leave your family with an additional Rs.35 Lakh to cater to their daily sustenance.
But unfortunately, this HLIP would give coverage only up to the outstanding loan amount. This is again a big drawback of this policy in terms of giving life coverage.
5. Suicide or natural death benefits
Most surprisingly, this HLIP/HLPP does not return any sum assured value if the borrower commits suicide or dies due to natural death like a heart attack or normal death. It is limited to unnatural death only. Whereas, the term insurance plans provide coverages for suicidal death only after 3 months from the policy execution date. Many life insurers also extend this up to one year from the date of the policy.
Final words on Home Loan Insurance Plans or Home Loan Protection Plans
Look there is no doubt that you need to take an insurance policy if there is an outstanding loan burden on you. But if you ask me should you opt for a loan protection plan, I would say NO. A simple plain vanilla term life plan is a more cost-effective option that must be exercised by the borrowers.
Also, this is important to keep in mind that insurance should be perceived as insurance only and not an investment. Your ultimate goal should be protecting your acquired asset in your absence so that the loan burden does not come to your family while you are not alive.
General Q&A on Home Loan Insurance
1. How much is insurance on a home loan?
Generally, the premium cost of the home loan protection plan ranges between 3% to 5% of the loan amount. However, it also depends on other factors such as your age, your loan amount and other factors. Thus, this is not cost-effective insurance at all to the borrowers.
Unfortunately, the answer is NO. It comes bundled with the home loan itself. The lenders such as Banks, NBFCs and other financial institutions would offer you this insurance at once. Though this is not compulsory as per regulatory framework, this can be said that lenders secure their loans by imposing this insurance on the borrowers
A loan protection plan is basically an insurance policy that covers your outstanding loan amount only. This means if, during the policy term the borrower dies, the insurance company would repeat the outstanding loan balance to the actual lender. This policy does not have any connection in covering your life.
This insurance provides for deduction u/s 80C of the income tax act. Full loan repayment is done by the insurance company to the lender while death occurs to the borrower and giving zero botheration to the family members.
Don’t buy a home loan protection plan. Just stick to the basics and simply buy a term life insurance policy equivalent to 8 to 10 times of your annual income. It might save you some extra money for a long period of time. After the death of the borrower, your family would repay the outstanding loan amount to the lenders and the remaining amount would help them to fetch a regular stream of income over a period of time.
NO. Any SBI Life insurance is not mandatory for taking a home loan. But due to its bundled loan arrangement, the borrowers are left with no other option but to buy this home loan in.
If you talk about home loan, the insurance company can not give you a home loan. It is not permitted to do so. But a life insurance company give you loans against your life insurance policy. Generally, this loan value does not exceed 80% to 85% of your policy surrender value. A big example is Life Insurance Corporation of India.