The process of homebuying is never over until the very last EMI has been paid off. That's when your home is truly and entirely yours. A precaution we often forget to take, when it comes to our home loans is an insurance cover for it. While it has not been ruled as mandatory, homebuyers today are increasingly opting for this plan, acting out of caution and foresight. There's a lot that remains uncovered about home loan insurances, still. In this article, we will endeavour to break down the idea of home loan insurance, so you comprehend its importance and urgency, deftly.

WHAT IS HOME LOAN INSURANCE?

The most common misconception is that home loan insurance, is just another term for home insurance. However, the two are not the same at all, except for perhaps their common goal of protecting what is precious to you.

A home loan insurance is a scheme of policy plan that helps cover the loan amount you have undertaken from a bank, for the express intention of buying your home. Should the borrower be unable to pay back the loan due to unforeseen circumstances, the insurer will then step in and settle the outstanding amount. It is important to note that the cover provided by the insurer decreases with each passing year, keeping in tandem with the diminishing outstanding loan amount.

Home loan insurance is also integral in ensuring that banks don't incur bad loans in the form of non-performing assets. While buying home loan insurance isn't made compulsory yet, many banks do recommend opting for a plan, at the time of sanctioning the loan amount itself. Often, the premium is built into the loan amount, as an incentive.

WHEN IS AN INSURER LIABLE TO PAY?

The key purpose of buying a home loan insurance policy is to make sure that your home loan is paid, despite the times in duress. While no one can predict calamities and tragedies, one can certainly take measures to minimize their effects. A home loan insurance aims to do just that. The borrow protects his immediate family from the financial distress in the event of his sudden demise or some unforeseen circumstance that stops his earning capacity, such as a disability as well. This also includes terminal illness, and unemployment up to 3 - 6 months of EMI payments. At such a time, the insurer steps in and pays off the outstanding loan amount, relieving the family of its financial obligations towards the loan provider, without endangering the ownership of their home.

TYPES OF HOME LOAN INSURANCE

Granted that the phenomenon of home loan insurance is gearing popularity amongst homebuyers and borrowers only now, however it is crucial to possess all the required information before one opts for an insurance plan - mainly because it could have very permanent financial repercussions on your family, in your absence. There are two types of home loan insurance plans available in the Indian insurance market, namely a vanilla home loan insurance plan, and the other one being a term insurance plan. After examining both closely, one will be able to weigh both options and see which one suits their needs better. Let's take a look.

1. Home loan insurance plan

Often deemed as a more traditional approach to home loan cover, this variety of home loan insurance plan covers only the loan amount that has been undertaken by the borrower, during the tenure under which the loan has to be paid back.

- Many banks offer a plan where the premium for the home loan insurance is bundled with the loan amount. This would mean that the premium would be paid off by the borrower along with their actual EMI amount.

- Should the borrower choose to pay the premium themselves, they would have to pay it at one go, at the beginning.

- The premium, like for any other insurance plan, depends on the loan amount, the borrower's age, medical records and the loan tenure.

- The premium is eligible for a tax deduction under Section 10D and Section 80C. However, the premium that will be paid off throughout the loan tenure is not eligible for a tax deduction.

- The most important characteristic of this type of home insurance plan is that over time, the cover offered by the insurer decreases, alongside the diminishing loan amount. To illustrate this point, let us take look at an example - If the borrower has undertaken a loan amount of ₹50 Lakhs and unfortunately dies, having paid ₹40 Lakhs back, in the form of EMIs, then the insurer is then obligated to pay only the outstanding amount, which, in this case, would add up to ₹10 Lakh, and not a rupee more.

- In case the borrower has repaid the loan in its full entirety or even prepaid the loan, they are not entitled to the insurance cover in way or form.

2. Term Insurance Plan

This is the second alternative, to the more straight cute home loan insurance plan. Term insurances secure the sum assured - which in this case is the outstanding loan amount, for the fixed amount of time.

- If a borrower opts for this plan, they are obligated to pay an annual premium, which is considerably cheaper than the premiums paid on the home loan insurance plan.

- The most notable aspect of such a plan is that should the borrower survive the tenure of the insurance, the policy lapses and they get no share of the cover. The insurer keeps the whole premium. In the case of a home loan, note that the duration of the insurance policy is equal to the remaining tenure of the outstanding home loan amount.

- In contrast to the vanilla home loan insurance plan, where the cover reduces over the loan tenure, a term policy maintains the original loan amount as the total cover throughout the tenure. Going back to our previous example - the borrower has undertaken a loan amount of ₹50 Lakhs and unfortunately dies, having paid ₹40 Lakhs back, in the form of EMIs. Under a term insurance cover, the family will receive a whole sum of ₹50 Lakh as a cover, as initially applied for.

- With such compensation, the term plan not only covers the outstanding loan amount, but also provides financial aid at the time of distress.

- Some term plans also offer maturity incentives if the borrower outlives the policy/loan tenure.

WHICH SHOULD YOU PICK - A TERM INSURANCE POLICY OR HOME LOAN INSURANCE?

The debate around this is endless and despite all the expert opinions at your disposal thanks to the internet, you are the best judge of your finances and the risks you can take on. The term insurance seems like a viable option for many, given its stretch, and how much it covers under its umbrella. It is also recognized as the more economical plan if compared to the regular home loan insurance. However, it is important to note that if the premium for the home loan insurance is paid at one go, the borrower is eligible for a considerable tax deduction.

We suggest weighing both the long term and short term effects of option of a home loan cover - be it through term insurance or the regular home loan insurance. Be sure to read the fine print of whichever policy you choose and always place it in the context of your own financial health and standing.