Attention : Home Loaners! Read this article in case you don’t have Home Loan Insurance, i.e. a life insurance that works to cover your home loan liability just in case you were to die.
Imagine this situation – if you were to die, not only will your family stop getting the income you contribute but the home loan you have taken will put them back financially by lakhs of rupees in debt! There have been quite a few cases like this and in each one the family has had to go through a lot of pain, and in some cases, has had to sell the property to pay back the dues!
And before I get to the solution, remember that whatever it is, if you have taken a home loan it is YOUR responsibility to ensure that your family is liability-free, especially such a large liability.
Click on the relevant status below.
I have a Home Loan already.
For those in India who already have taken a home loan but have not taken a home loan insurance, the situation is as risky as unprotected sex with a stranger! We need to take some immediate steps from options listed below. This is explained through an illustration.
If Raghav has taken a home loan from say HDFC Ltd. for Rs. 50 lakhs for 20 years, which started say 6 years ago. Roughly, the installment he is paying will be Rs. 60,000 per month. After paying the installment for the past 6 years, as on date, there is an outstanding principal of say Rs. 45 lakhs.
I. Take a Home Loan Insurance attached to your home loan :
These days, almost all the lenders be it housing finance companies, banks, etc. are tied up with life insurance companies to offer life insurance cover linked to the home loan, to their home loan customers. So all you need to do is go back to your home loan provider and tell them you want to take a home loan insurance.
So Raghav has to go to HDFC Ltd. and request them for a home loan insurance to cover his loan, i.e. through a life insurance policy attached to the home loan. HDFC Ltd. will speak to their partnered life insurance company (most likely HDFC Life) and give you a home loan insurance, i.e. a life insurance policy that will cover your loan to the extent of the outstanding principal as on date, i.e. Rs. 45 lakhs. They may either take a separate premium cheque from you or revise the installment upwards to say Rs. 66,000 per month. The amounts are indicative only. That’s it – your family is now protected. In case you were to die now, HDFC will not demand anything from your family – they will get the outstanding amount from HDFC Life, and the home will be transferred to your family.
The advantages of such an attached home loan insurance are
- you pay premium only for the outstanding principal of the home loan which keeps reducing as you keep paying the installments. The premium is minimal and it is easy to pay since the installment is revised marginally upwards.
- Secondly, since the home loan insurance is attached, as mentioned above in Raghav’s case the nominees do not have to take the trouble of going through the pain of settling the outstanding principal.
II. Take a Standalone Life Insurance from an insurance company :
A standalone life insurance works almost like a Home Loan Insurance. It is nothing but a term insurance policy from an insurance company. Such policies can be compared and bought online, and premium rates are extremely attractive now. How much to take? Up to the extent of your home loan liability when you are taking the policy.
Important : If you are choosing this option, ensure that THE NOMINEE OF YOUR LIFE INSURANCE POLICY AND THE OWNER OF YOUR HOME IN CASE OF YOUR DEATH, ARE THE SAME!!! This is done so that they are use the proceeds from the life insurance policy to pay the outstanding principal of the home loan at the time of death.
Raghav can go to say Birla Sun Life and take a term insurance policy of Rs. 45 lakhs Sum Assured paying a premium of Rs. 3,000 say. Again, this is an indicative price.
Please note that
- the term plan is not attached to your loan, like in a home loan insurance policy. In case you die, the insurance company will pay the full amount to your nominee and then your nominee will have to separately settle it with your home loan company, if they choose to, or continue paying EMIs if a co-owner is still alive.
After 10 years from today, if Raghav dies, Birla Sun Life will pay your nominee (typically your spouse) Rs. 45 lakhs and your nominee will have to pay the outstanding principal at that time which could be say Rs. 35 lakhs to HDFC Ltd., or use the Rs. 45 lakhs to pay remaining installments by becoming the new owner of the loan, if HDFC Ltd. agrees to that).
- The Sum Assured of the term plan is a fixed amount unlike in home loan insurance. Unlike option I, it does not come down when you pay further installments because it is not attached to the loan. So while you will pay a higher premium, your family will also get a higher benefit in the case of your death.
Splitting your policies
Always take separate policies for each debt/loan that you want to cover. So that in case the debt/loan is paid off, you can close that policy as well. If you have only one high-cover plan to cover everything, you will unable to bring down the life insurance cover of that one policy since the insurance company will not allow that. So you will have to keep paying for the whole policy and for a long period unnecessarily. If you try for a new plan, it will be expensive since you age will be much higher now.
I will be going in for a new Home Loan shortly.
You are lucky that you have not been in an ‘unprotected’ stage yet. You have the opportunity to ensure that you start a new liability only after you safeguard your family adequately from the financial risks arising out of your death, especially if you also have a home loan.
When applying for a home loan, ask the company to give you an attached home loan insurance plan. These day, most home loan companies make sure that they make you take one. But don’t listen to them if they tell you that unless you take the insurance plan, they will not sanction the home loan. Read the Caution 2 note towards the end of this article and tell them you know all the rules!
- When you and your spouse or anyone else are co-owners of the new home, ensure that both of you are protected through the life insurance cover.
- IRDA has clarified recently that bundling of insurance with other financial products such as home loans cannot be thrust upon by the insurance distribution partner, here your home loan company. So you, the customer, have the final say on the choice of where to take the home loan insurance from. But whatever you do, don’t forget it to cover your home loan!
Good luck with your home loan insurance.