Home Loan Protection Plan
Mortgage Insurance or Home Loan Insurance or Home Loan Protection plan is an insurance plan in which the insurer pledges to repay the balance home loan amount of the insured, should the insured passes away before completing their home loan repayment or loses regular income due to full or partial disability. In such a case, the insurer will step in and pay the outstanding loan amount to the lender on the behalf of the insured. To put it simply, Home Loan Insurance is the cover for the home loan. If the home loan borrower is unable to repay the loan due to disability (both partial and full) or death, the mortgage insurance saves the family of the borrower from the burden of debt. Once the policy is issued and becomes effective, the borrower does not need to worry about the home loan burden on his family even if he passes away untimely.
Difference between Home Loan Insurance & Home Insurance
Even though both are insurances and even sound similar, but they serve totally different purposes. Home Loan Insurance provides cover for the borrowed amount of home loan against non-repayment, while Home Insurance provides cover for the damage/loss of the building/infrastructure/content of the house in cases of theft, fire, earthquakes and other natural calamities. Home Insurance does not provide any cover against the repayment of the home loan and vice-versa.
Why is Home Loan Insurance important?
Home Loan Insurance Plan safeguards the payment of the home loan in the case of the demise of the borrower. This provides a cover to the family and the dependents of the borrower from the burden of the home loan debt which would have fell on their shoulders otherwise if the borrower had not availed the loan insurance plan. In case of default on home loans, the lender of the home loan is entitled to vacate the occupants of the house and sell the house/property to recover their home loan. Hence a home loan insurance is not beneficial during the lifetime of the borrower, but is of great help to the family and dependents in the case of demise of the borrower, who otherwise would have to either bear the loan burden or give up the occupancy and vacate the premises, so that the lender can auction it to recover their lent amount.
What are the Features & Benefits of Home Loan Insurance?
Sadly, the most important features and benefits can be realized only after the demise of the insured or if they become critically ill or disabled hence losing their regular income. However sad, these features and benefits are really very useful to the family of the insured when such time comes for them to avail the policy coverage. Let us have a look at some of the highlights of the Home Loan Insurances.
- During lifetime, the insured can claim tax benefits on policy under the section 80C.
- After demise, saves the family from the burden of the debt.
- Saves the property from being confiscated from the survivors.
- Loan protection plans come with different riders to cover all the possibilities. The different riders that are available are:
- Terminal or critical illness
- Accidental Death
- Job loss/income loss for 3-6 months
- Disability both partial and full.
5. A majority of mortgage insurances provide life coverage which is equal to the outstanding home loan amount, which comes to an end as soon as the loan is repaid in full.
How to Claim for home loan insurance?
- The home loan insurance is always taken on the name of the borrower of the home loan. In case of death of the borrower, the family members of the borrower need to file and obtain the claim amount.
- One needs to submit the death certificate and the home loan insurance documents to the policy provider.
- After verification, the amount is directly paid to the lender or in some case to the family member beneficiary.
- In case of home loan insurance policies, where the borrower is alive beyond the term of the policy, he/she will not get back the premium paid in any condition.
Is it mandatory for the Homeowner to have Insurance?
Contrary to the case of vehicles, where you need to have insurance as soon as you have the vehicle’s key in your hand, insurance is not a must in case of housing. A person can own a home without having it insured. However, the lenders look down on this situation. All the lenders lend money, so that they can make money on it through the interests. Since the amount borrowed in the case of home loans is higher, they need an assurance or guarantee on the timely repayments. Both home insurance and home loan insurance provide a guarantee to the lender about the repayment of their lent amount even if something was to happen to either the property or the borrower. In case of the borrower not opting for an insurance or protection plan, the lender has the right to either charge more on the interest or even turn down the application owing to the risk involved should they feel so.
Things to Consider Before Home Loan Insurance
After having read so far, before you feel the urge to dive in and apply for a loan protection plan immediately, it would be a wise thing to consider the different aspects of an insurance protection plan.
1.You can avail 3 types of home loan insurances, viz. Reducing Cover Plan, Level Plan and Hybrid Plans.
a. Reducing Cover Plan: The cover provided reduces as the outstanding loan amount reduces with time.
b. Level Cover Plan: The cover remains the same throughout the loan tenure.
c. Hybrid Cover Plan: The cover provided is full in the first year and then it reduces as the outstanding loan amount reduces with time .
2. good a loan insurance plan is, it is not mandatory. Hence you have no obligation to opt for it.
3.Tax benefit can be availed for a mortgage insurance premium, as long as the premium has been paid out with a loan. If you are availing this insurance with money of a loan, it is better that you do not opt for this insurance at all.
4. In the cases of balance transfer, prepayment and restructuring of home loan, the mortgage insurance ceases to exist.
Why you should not Buy Home Loan Protection Plan?
The cover provided by Home Loan Protection Plan is linked to the outstanding amount of the home loan. Let us take a real world example here. Mr A buys a property worth INR 60 lakhs with a home loan of INR 50 lakhs. For this home loan he buys a mortgage insurance plan. This plan starts at the same time as the home loan repayments start. The initial cover provided is entire INR 50 lakhs. Now let us fast forward 15 years in to the future. In these 15 years, Mr A repays his home loan in a timely fashion and at the end of it he has still ₹ 2,140,958 outstanding on his home loan. If Mr A passes away, the mortgage insurance plan will directly plan to the lender the outstanding amount left, which is ₹ 2,140,958 without Mr A’s family to worry about the loan or forfeit the house. Hence the total cover provided remains a little over INR 21 lakhs. If 15 years back, Mr A had opted for a term insurance cover of INR 1 crore instead; his family would have received this entire cover amount from which they could have paid the outstanding ₹ 2,140,958 and still be left with ₹ 7,859,042 which really would have been a handful.
As it is clear now, a home loan protection plan is useful only when you do not have an active term insurance cover for your family. Since the mortgage insurances are never mandatory, it all comes down to the individual choice. A wise person will consider all the available options before finalizing any option.