Home Loan Insurance in India

What is Home Loan Insurance?

Home loan insurance, also known as a Home Loan Protection Plan (HLPP) or mortgage loan insurance, is a specialised plan that safeguard borrowers and their families from the financial strain of repaying a home loan due to unforeseen circumstances. This insurance ensures that the remaining balance of the home loan is paid off if something happens to the borrower, such as death or severe disability.

Key Points to Understand in Home Loan Insurance

Here are the purpose and coverage duration explained below, which act as a key pointer in understanding home loan insurance:

• Purpose: The primary objective of home loan insurance is to cover the outstanding balance of the loan amount. If the borrower passes away or becomes incapacitated, this policy will settle the remaining loan amount with the lender or bank.
• Coverage Period: Typically, the policy period matches the home loan term. So, if you have a 20-year loan, the insurance coverage will also be for 20 years.

Significance of Home Loan Insurance

The following reasons explain the importance of home loan insurance policy for homeowners in India:

1. Protects Family: One of the foremost reasons to consider home loan insurance is the protection it provides to the family. In the unfortunate event of the policyholder's death, the policy ensures that the family is not responsible for repaying the remaining loan. This can prevent them from facing financial hardship or losing their home during their most challenging time.
2. Safeguards Lenders: Financial institutions like banks, NBFCs, and housing finance companies prefer minimising non-repayment risk. Home loan insurance helps protect the lender's investment by ensuring that the outstanding loan balance is covered, thus reducing the risk of default.
3. Avoids Financial Burden: Without home loan insurance, your family may struggle to meet the monthly payments, especially if you were the primary breadwinner. The home loan insurance policy minimises this risk by ensuring the loan is paid off, thus safeguarding your family's financial stability.

Characteristics of Home Loan Protection Insurance

The below explained pointers are the various characteristics of home loan insurance:

1. Premium Payment Options
   • Lump Sum Payment: The insurance premium can be paid in one go, covering the entire policy period upfront.
2. EMI Integration
   Alternatively, the premium can be added to the home loan amount and paid off in monthly installments along with the loan EMIs. This makes it more manageable if the policyholder prefers not to make a one-time payment.
3. Coverage for Joint Borrowers
   The insurance covers all co-borrowers if multiple individuals have co-borrowed the home loan (e.g., family members such as spouse, daughter, son, mother, father, etc.). This means that if any co-borrower passes away, the insurance will cover their share of the outstanding loan.
4. Riders and Add-Ons
   • Basic Coverage: At its core, home loan insurance covers death.
   • Additional Riders: You can opt for riders to enhance the coverage. These can include protection against critical illnesses (such as heart attack or cancer) and permanent disability causing unemployment. Some plans also offer coverage for temporary loss of income, covering up to six months of EMI payments.

Credit Protect Coverage and Benefits

Credit protection cover is a type of home loan insurance that is an outstanding loan protection policy offering the following coverage and benefits to the insured:

1. Base Sum Assured
   The base sum assured is determined based on your home loan amount. This is the amount of coverage provided by the policy.
2. Death Benefit
   • Payment: If the insured passes away during the policy term, the Effective Sum Assured is paid out to the nominee. This amount is used to clear the outstanding loan amount.
   • Grace Period: If death occurs during the grace period following a missed premium payment, the policy remains valid, but unpaid premiums are deducted from the death benefit.
3. Payor Accelerator Benefit
   • Terminal Illness: In case of a terminal illness diagnosis, the insured receives a lump sum amount. This helps cover immediate expenses.
   • Policy Continuation: The policy continues even after receiving this benefit, and premiums must be continued.
4. Payout Options
   The entire death benefit is paid out at once, which is ideal for clearing the entire outstanding loan balance immediately.
5. Staggered Benefit
   The death benefit can be received in installments as per the policy wordings. The nominee can choose the frequency of payments (annually, semi-annually, quarterly, or monthly) and can also opt to receive future installments as a lump sum discounted at a specified rate.
6. Maturity and Surrender
   • No Additional Benefit: There is no additional benefit if the insured survives the policy term. The policy simply ends without further payout.
   • Regular Pay Policies: No surrender value is available.
   • Limited Pay Policies: Surrender value is available if premiums have been paid for at least 2 years. This value is calculated based on a factor multiplied by the total premiums paid.
   • Single Pay Policies: A surrender value is available any time after payment, based on a factor multiplied by the single premium paid.

Other Key Features

Here are the other vital features under credit protection cover explained below:

1. Grace Period
   • Duration: There is a specific grace period for annual, half-yearly, quarterly, and monthly payments defined in the policy documents.
2. Revival
   • Conditions: Policies can be revived within certain years (as defined by the insurer) if premiums are missed. This requires a written request, a health certificate, and payment of overdue premiums with interest.
3. Free Look Period
   • Cancellation: If unsatisfied, you can cancel the policy within specific days (as defined by the insurer) and receive a refund in specific percentage minus specific costs.
4. Exclusions
   • Suicide Clause: If the insured commits suicide within certain time period of policy issuance, the nominee will receive at least some percentage of premiums paid or the surrender value, whichever is higher.

Tax and Regulatory Norms Under Credit Protection Cover

• Tax Benefits: The premium amount is deductible under Section 80C. However, consult a tax advisor for a better understanding, as tax laws may change.
• Assignment and Nomination: The assignment and nominee selection is available or allowed as per the policy regulations. Hence, read the policy wordings to get information related to it.
• Prohibition of Rebates: Rebates or discounts on premiums are not allowed, and violations lead to penalties.

Difference Between Home Loan Insurance & Home Insurance

The table below highlights the difference between home loan insurance & home insurance policy: