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Home Loan Insurance: Its Definition And Benefits

Have you ever thought what would happen to your home loan if anything unexpected happens to you in the future? Can your family repay the balance amount? You definitely do not want the burden to fall on them after your untimely demise. Home loans are generally long-term, i.e. the tenure can go up to 30 years.
This is where housing loan insurance plays an important role. Although RBI and IRDAI have not made it mandatory to opt for taking up an insurance plan, it covers the loan amount in your absence.
What is home loan insurance?
Also known as Home Loan Protection Plan (HLPP), is a scheme offered to settle the outstanding with the lenders in case of unforeseen circumstances. It relieves the pressure from your family as they do not have to vacate or repay the balance amount in your absence.
What are the features and benefits of home loan insurance?
• It offers lump sum amount benefit that you can use to repay the outstanding housing finance.
• The insurance policy could lapse if you repay the entire amount, restructure the loan, or transfer the balance amount.
• The beneficiary ...
... or the policyholder should pay the lump sum amount.
• You are entitled to tax benefits under Section 80C and 80D from the insurance.
• A single home loan insurance covers all the borrowers in case of a joint loan.
• Medical conditions such as critical illnesses and disability get covered under the housing insurance plan if you pay extra premiums.
• You get plenty of flexibility under the insurance. You can either pay a single/whole premium, or insurance amount gets adjusted in the total loan amount that you can repay on an annual basis.
• You can also convert your premiums into amount which you can pay as housing loan EMIs.
• Home loan insurance does not cover critical illnesses such as suicide or death due to natural reasons.
What is the difference between home loan insurance and housing loan?
There is a huge confusion between the two terms. They are different and serve different purposes. Home insurance protects your house against risks such as:
• Damage of the property owing to theft.
• Damage caused owing to natural calamities such as earthquake, storm, flood, fire, etc.
It acts as a replacement cost of your home. However, the insurance covers only the balance loan amount from the time it is bought. Most of the lenders provide insurance along with the loan schemes nowadays.
What are the types of home loan insurance?
There are three types of loan insurance you can choose from:
• Level cover plan: Here the coverage remains the same throughout the housing finance tenure.
• Hybrid cover plan: The coverage remains full in the first year. As the balance amount reduces with the mandate, the coverage reduces as well.
• Reducing cover plan: Here the coverage, as well as the dues, reduces with the tenure.
Mihir Yande is a finance professor who has spent considerable time researching onhousing loan. He has given an overview of home loan insurance and how it works.
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