The concept of home loan insurance has become as famous as the concept of a home loan. But, people still harbour questions and inhibitions regarding this concept. There are many who would still confuse home loan insurance with home insurance.

What is Home Loan Insurance?

A home loan insurance is a scheme or policy which covers the home loan taken by a borrower. The insurance party will settle the outstanding loan amount with the lender (or the bank) in case the borrower is unable to do so because of unforeseen circumstances.

Lenders like banks may advise borrowers to opt for an insurance while applying for a loan. No bank wants the loan to turn into a bad debt, and the easiest safety net is a home loan insurance policy. Borrowers, too, feel the need for such an insurance to protect their families from the burden of the loan in case of unfortunate events.

As a home-buyer and a borrower, one has two options to seek insurance for their home loan - home loan protection plan or term insurance policy.

Home Loan Protection Plan

• When one applies for a separate home loan protection plan, it covers the outstanding amount to be paid in case of the death of the borrower. Premium rates of such a policy depend on factors like loan amount, borrower's age, borrower's medical history and the loan tenure.
• Under such a plan, the loan cover is bundled with the loan amount. One can decide to pay the initial premium themselves, or they can get it funded by the lender.
• Paying the premium by themselves would mean that the borrower pays a one-time premium, which is eligible for tax deduction under Section 10 (10D) and Section 80C.
• If they decide to get it funded by the lender, then the premium would get included in the instalments, thereby increasing the monthly EMIs. They will not be eligible for tax deductions in this case.
• The insurance cover of such a plan reduces as the loan is repaid. Consider a borrower who has taken a loan of ₹50 lacs and has taken a home loan insurance cover for the same. If they die at a time when ₹40 lacs have already been repaid, then their family would be eligible for a cover of the remaining amount, i.e ₹10 lacs, only.
• Consider a case where the borrower pre-pays, restructures or transfers their loan. In doing this, they would become ineligible for the benefits of the home loan insurance plan. Since the one-time premium has already been paid (fully or in part), any changes in the loan repayment process will not be applicable to the policy.

Term Insurance

• The other alternative available to the home-buyer is to take a term instance. Most financial experts advise in the favour of a term insurance policy since it is cheaper and provides a higher cover.
• As opposed to a home loan insurance plan where the cover amount reduces as the loan is repaid, a term insurance plan maintains a constant cover amount throughout the insurance tenure. Consider the same borrower who has taken a loan of ₹50 lacs and has taken a term insurance plan for the same. If they die at a time when ₹50 lacs have already been repaid, their family will be eligible for a cover of ₹50 lacs, as initially applied for.
• The implication of this is that not only does a term plan cover the outstanding loan, but it also covers other financial requirements that borrower's family may have in case of the untimely death of the borrower.

All home-buyers and borrowers must remember that it is not mandatory to avail a loan insurance or term insurance plan. Some banks may insist or pressurise borrowers to do so, but it is entirely the borrower's decision. Banks cannot reject a loan application on this basis.

If one wants to avail a loan insurance, however, they can do so through a general insurance company or life insurance company.