When you take a home loan, it is likely that you will be told to buy home loan insurance too. It has become increasingly common that home buyers are sold the insurance along with home loan.
There is no denying the fact that insurance is important but it is the right of the customer to decide instead of being pushed the product.
First and foremost, it is vital to know that regardless of what the bank is saying, insurance is not a pre-condition for a home loan. There is no directive issued from banking regulator i.e., RBI regarding compulsorily buying an insurance with home loan.
Not only this, it is a common practice for banks to push a particular product instead of offering choices to borrowers.
For example, the home loan lender may add householder’s insurance that covers damage to property and belongings as a result of natural disasters. This covers quite unique risk scenarios and may not be helpful in certain cases – for instance, when the property is under construction.
Loan protection plan
One of the products that is quite popular is ‘loan protection plan’. This given protection on the outstanding loan amount and the coverage declines over the year as the loan gets repaid.
This is usually a single premium plan with the option to pay premium with the EMI (equated monthly instalment). One might tend to believe that there is no extra cost to get insurance on the loan.
However, there could be a number of shortcomings to this too. First of all, in case you happen to prepay the outstanding loan, you don’t get coverage for the loan tenure. Another thing is that if you refinance the loan, the insurance- in that case — can't be ported and one will be compelled to take a new insurance cover.
Is this indispensable?
Having said this, it doesn't mean that home loan borrower doesn't need an insurance cover. As we are aware it is vital to mitigate risk. When you take a home loan for say 15 years, some unfortunate event could strike the borrower’s capacity to pay, which would add an unnecessary burden on his dependents.
The minimum insurance that one needs should ideally cover outstanding loan in case of an emergency, which could threaten the possibility of defaults in payment.
A rule of thumb is that a borrower should take a term insurance policy. If you have an existing policy then you can assign that to the lender instead of taking a new one. Aside from this, one can also take a householder's policy to cover property and valuables against the risk of fire etc.
It is imperative that you go for the best insurance products as some insurers offer quite interesting features. Some plans come with flexible tenures - which could be as low as five years. But don't forget to read the fine print in the policy as there could be a range of exclusions in the coverage that could restrict the benefits.