You are planning to purchase your dream home. You have move toward various banks to get the best deal on home loan. After so much hard work, you have decided a bank. At the time of availing Home Loan, nearly all Lenders insist the Borrower to buy Home Loan insurance Plan and tell them it as compulsory to purchase for availing Home Loan. You were politely told that you don’t need to it and you will not have to pay anything right now. The premium amount will be added to your loan amount. Now, you want to actually know what home loan insurance plan is.
So, we will tell you all about home loan insurance plan.
Home loan insurance
Under this plan, insurance companies settle down any outstanding amount on the home loan with the bank or lender in the case of death of the borrower. The policy term is frequently same as the loan tenure. This way a borrower can ensure that his or her family will not have to vacate the house due to non-repayment of home loan after death of the borrower.
Home loan insurance plan is differ from home loan.
On the other hand, home loan insurance is simply to protector against the risk of default on home loan in the case of death of the borrower. In the case of death of the borrower during the loan tenure the insurance company will settle down the outstanding loan with the lender. It is not compulsory to buy home loan insurance plans.
The policy could lapse on full repayment of loan or after death of the borrower or on transfer of home loan to another bank. Some plans will continue till the end of the term even if the loan has been repaid. With such plans, the life cover and the policy period will vary from the loan’s outstanding principal and tenure. Click here to read about Home loan by PNB housing.
Types of home loan insurance
Reducing cover option: Under this, the life cover reduces similar to loan repayment schedule i.e., the life cover goes down like your loan’s outstanding principal. At any point in future, your life cover is greater than your outstanding loan principal.
Level Cover Option: Under this, life cover remains constant for the term of the plan.
Fixed Cover for years then by reducing cover for the remaining years.
Home loan insurance is mostly single premium policies. But there are alternatives available for regular premium and limited premium payment terms. In case of regular premium plans, premium payment term is same as policy term and in limited premium payment plans, premium payment term is less than policy term.
Under single premium plans, banks offer an option to club the premium amount with the loan amount.
Merits of home loan insurance
In case of unfortunate death of the borrower, the insurance company settles the loan amount with the lender. The excess amount is paid to the beneficiary of the policy holder.
You get tax benefits under Section 80C.
You can opt for other criteria such as critical illness or disability. In such a case, your loan amount is also covered in cases of critical illness or disability.
A single plan can cover all the borrowers under a joint loan. You do not need to buy separate insurance plan for each borrower.
Demerits of home loan insurance
Home loan insurance plan are expensive as compared to plain term plans.
In case of single premium policy, where you select to club the premium amount with the loan amount, you will not get any tax benefits for the year under Section 80C. Some plans offer to provide separate receipt for premium payment for 5 years to allow you to claim tax deduction. For instance, if single premium of Rs 1,50,000 was involved in your loan amount then you will receive premium payment receipts of Rs 30,000 for first 5 years.
In case of foreclosure of loan or transfer of loan to another bank then you may lose whole or part of the premium. Different plans have different treatment of such cases. Under a few plans, the risk cover ceases with no return of premium. Under other plans, borrower’s life cover continues until the end of policy period.
Surrender value ranged from 50%-70% of remaining premium for single or limited premium payment plans. Regular payment plans do not have any surrender value.
From the above information, you must understand it is needed to have an insurance plan cover your home loan liability. If your existing term plan can cover your home loan then you don’t need to buy a new plan. A term plan is a better option than home loan insurance plan.
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