It's hard to miss the HDFC Standard Life home loan insurance advertisements on television these days, "Mr Kumar rahe na rahe, Kumar Sadan hamesha rahega."
However, unlike the fictitious Mr Kumar, there are many individuals who worry that about the adverse impact of the home loans if something happened to them. This is where a home loan insurance product comes to the rescue.
Home loan insurance plans, also known as mortgage redemption plans are policies that cover your home loan liability. Though there are some minor variants, most plans offer a sum assured that reduces as your outstanding home loan comes down every year.
In such plans, it is not your home but your loan that is covered should something happen to you. For instance, if you have taken a home loan of Rs 40 lakh (Rs 4 million) and covered this through a home loan insurance. If after a year, your outstanding loan comes down to Rs 39 lakh (Rs 3.9 million), then your sum assured also comes down to Rs 39 lakh. In short the sum assured is adjusted against your home loan liability.
This insurance is much like the term plan or pure risk cover plans that are available from various insurance companies. There are exceptions like ICICI Bank (through their tie-ups with ICICI Lombard) home insurance loan where the sum insured remains constant.
And in the event of death of the life assured, the outstanding home loan is cleared off and the rest is paid to the family. Some characteristics of such plans include:
- Low premiums, high cover
- No maturity amount on survival of the term
- Choice of one time premium or regular premiums
However, the cover in term plans available in India are level term plans where the cover remains the same whereas in the case of home loan covers, the amount keeps falling as the home loan liability decreases.
Also it is important to know that while most term plans can be bought till the age of 55, home loan insurance plans can be bought till the age of 60. However, the medical underwriting is stringent and it is only after adequate tests that these policies are issued at the higher age band.
If one opts for a joint application then the premium is double. And if any of the joint applicants die, the loan is paid off by the insurance company. The premiums are calculated based on the medical underwriting, based on your age and medical record. The conditions are:
Age of the life insured: The premium increases with age. Medical tests increase with age and are mandatory above 40 years. Below this age, a simple declaration is good enough though this depends on each insurance company.
Your medical record: If you are in good health, the premiums will be regular but if the insurance company's prognosis about the life assured is at higher risk, then the premiums will be higher. A past family history of early death or critical illness will also increase the premiums.
Loan tenure: The premium will increase with the duration of the loan. A cover of Rs 50 lakh (Rs 5 million) for five years and a cover of Rs 50 lakh for 20 years will attract different premiums, with the latter being more expensive.
Since this is a life insurance plan issued by an insurance company, the premiums paid towards life insurance schemes are eligible for deductions under Section 80C. However, if the premium is clubbed within your equated monthly instalment of the home loan, then you will not get the Section 80C benefit.
Most banks have tie-ups with insurance companies for the issuance of such policies. There is always the question that whether it is better to take a term plan and insure the life that is going to repay the home loan or go for home loan insurance.
A factor that tilts the argument in favour of term plans is the cost, which is much less and remains constant as well.
However, a majority of the people should get thorough needs analysis done and not just cover their home liability but other liabilities as well, dependent goals (financial needs of children) and dependent income goals (monthly needs of family if you were to die) as well.
After this, take a term plan for the requisite cover needed. For those who cannot undergo this exercise, opting for the home loan insurance cover might make sense.
The writer is director, My Financial Advisor
