The prime reason for the title is that protects dependents from the borrowerâ€™s liability.
Let us take the case of RY who just bought the house of his dreams. RY got married two years ago, and is now the proud father of a four-month old had been scouting for a house for sometime. Finally, he decided to take the plunge.
He told his friends and relatives that this house means everything to him and his family. Buying a house in a prime location costs a fortune. But with a housing loan, it seemed easy. He earns decent money from his event management business which helped in securing the loan quicker.
Some well wisher having financial knowledge has asked him whether he bought a home loan insurance cover. RY was ignorant of this. It turned out he had no idea there existed something like home loan insurance cover. Unfortunately, RY is not alone. Many people, like him, do not understand why they should buy an insurance cover on their home loan. The reason is quite straightforward. Protect your home loan Simply put, home loan insurance provides cover on ones housing loan, just as a life insurance policy covers ones life.
If the home loan borrower insures his home loan as a term policy and meets the adverse case of death during the term policy, the cover would provide a lump sum amount equal to the outstanding amount on his home loan. As the outstanding amount on the loan decreases over time, so does the cover under the policy. Let us consider an example. Suppose an individual took a housing loan of Rs 10 lakh for a period of 15 years. After repaying the principal amount of Rs 3 lakh, he met with an accident and died. His insurance company will pay the remaining amount of Rs 7 lakh to the housing finance company or bank that gave him the housing loan.
A home loan protection plan provides immense comfort to the customer, as it can ease some of the financial burden when a crisis strikes. It is in keeping with this benefit that clients (home loan borrowers) are advised by a lending institution to insure their home loans.
Premium options are, one can opt for either a single premium or a regular premium while buying home loan cover. A single premium is a one-time payment, while the regular premium option comes with a choice of annual, half yearly or quarterly payment options. In some cases, like HDFC Standard Life Insurance, one has a â€œlimited payâ€ option. This means you pay the premium for only two-thirds of the total term.
For example, if the home loan cover is for 15 years, you would pay premiums for only 10 years, even though the cover continues for the entire period. If the cover is for Rs 15 lakh housing loan for a term of 15 years then it will cost under a single premium option around Rs 33,270.
If one chooses to pay regular premiums, he would have to pay approximately Rs 6,510 for the next 10 years. As mentioned above, even though premiums are paid for 10 years, the cover would continue for the entire term of 15 years. Peopleâ€™s awareness on the need for credit protection increases the insurance companies are also seeing credit life products growing at least as much as the overall industry growth rate. SBI Life Insurance has covered around 6.5 lakh home loan borrowers since 2004. Around 20% of HDFC customers also opt for a home loan insurance cover.
Already have life insurance? According to senior bank officials, most people are reluctant to buy a home loan cover if they already have a life insurance cover.
Having a home loan cover is like having a hedge against liabilities. Insurance cover and other assets should be equal to or greater than ones liabilities.
If an individual is inadequately insured, he must buy extra cover. If an individual has a life cover for Rs 10 lakh and he takes a home loan of Rs 10 lakh, he might argue that since he already has a cover for Rs 10 lakh, he doesnâ€™t need to buy a home loan cover. He is wrong. If something happens to him, his dependents will be forced to shell out money from his life cover to settle the outstanding home loan.
It is possible that they will be left with little or nothing after that. Thus the purpose of the life insurance is completely defeated. To explain further, he has bought the life insurance cover because it would help his family to take care of itself if something happens to him.