A Guide To Home Loan Insurance

A home loan insurance covers the loan, not the home. It takes care of the amount you will owe the home loan company or the bank at the time of a calamity striking you, not the loan amount you initially borrowed.

Let's also assume that you took a loan of Rs. 20,00,000. After you pay up Rs 5,00,000 of the principal amount, you meet with an accident. This means, a balance of Rs 15,00,000 still has to be paid to the home loan company. This is the amount the insurance company will cough up. They will not pick up the tab on the entire amount (Rs 20 lakhs) but only on the balance amount owed (Rs 15 lakh). This way, your family is not left without a roof over their head; neither do they have the hassle of paying up the Equated Monthly Installment (monthly payment to be made to the home loan company).

Some insurance policies like the one offered by ING Vysya Bank, not only will the balance loan amount be paid off, your family will also receive the principal amount that has already been repaid on the loan, in the event of something unfortunate happening to you.

The premium to be paid for the coverage is decided by the insurance companies on a case-to-case basis. It will depend broadly on four conditions:

1. The age of the person taking the loan: The older you are, the higher the premium.

2. The loan amount: The larger the loan amount, the higher the premium.

3. The tenure of the loan: The longer the repayment period, the higher the premium.

4. The medical record of the individual: If you are in good health, the premium will be lower. For instance, if you have already had a heart attack or are in the high risk category, the premium will be higher.

Following points need to be borne in mind when shopping for a home loan insurance.

1. What is the insurance applicable for? Is it for death by any cause or is it only for death by accident? Also check whether there is a permanent disability clause. If this clause is present, the insurance company will clear the loan even if death does not occur, but permanent disability does.

2. Do you have to run around for it?

The home loan companies have teamed up with life insurance players to give you this benefit, so you do not have to run around for insurance claims. To claim the insurance, all you / your family have to do is hand over the death certificate or medical certificate for disability to the home loan company.

3. Cost of insurance - Some players offer this free of cost while others charge for it.

4. The minimum and maximum amount of coverage - The insurance is generally offered for the tenure of the loan and for the loan amount. However, do check if they have any limits. IDBI Bank, for instance, offers the insurance scheme up to a maximum of Rs 50 lakh (Rs 5 million) and for a maximum of 25 years, which is their loan and tenure limit.

5. Payment terms for the premium - The insurance company insists the premium is a one-time payment. But the home loan company gives the customer an option. You may pay the insurance company the entire amount upfront. If you do not have the money, the home loan player will pay the premium on your behalf and will add this premium to your total loan amount and it will become part of your EMI.

However, this option will be slightly more expensive for you. You will have to pay the home loan company interest on the premium since they have included it in your overall loan. However, the amount spread over the tenure of the loan does not amount to much every month.

6. Is a health check-up necessary - This varies from player to player. IDBI home loan customers must either submit a health declaration form or undergo a medical examination. If you take a home loan up to Rs 10 lakh (Rs 1 million) from Corporation Bank, a simple declaration of good heath is sufficient. Ditto if you are up to 45 years of age. If you are above this age limit, or your home loan limit is higher, a medical examination at your cost is necessary.

7. Exclusion clauses - Union Bank and Corporation Bank will not offer the insurance cover if death occurs within the 45 days of the start of the insurance cover, unless the death is due to an accident. Generally, death by suicide too is never covered.

8. Implications of Pre-payment of loan – If you repay your loan way in advance, you would have paid the insurance premium for the entire tenure. You need to check whether you lose the money or get it back. Corporation Bank, for instance, which has teamed up with Life Insurance Corporation of India, says the appropriate amount shall be refunded by LIC.

9. Implications of a Joint loan - If it is a loan with a nominee, then no question arises since the main applicant will take the home loan insurance. If it is a joint loan, two policies will have to be taken in the names of the joint applicants. A single application form would be used with the names of both the customers for policies and the premium amounts would get doubled. HSBC offers the younger applicant a 10% discount on the premium. In such cases, if one of the applicants dies, the loan is cleared by the insurance company.

10. Tax benefits on the premium - Since you are paying a life insurance premium, you can get deduction under Section 80C. However, if it is clubbed with your EMI payments, you may not get the benefit for the entire annual premium. The principal component of the EMI will get a deduction under Section 80C and the interest component under Section 24. Either way, you don't lose out. Whether you pay the premium at one go or along with your home loan, you still get the tax benefits.

If you already have a home loan but no insurance, ask your home loan company or bank if they will offer insurance for the remaining time frame. If they do not, then approach any life insurance company and ask them if you can buy a policy on your home loan.