A home loan insurance or mortgage insurance is an insurance which protects the borrower against life uncertainties such as death or illness. Taking a home loan insurance is significant for the borrower because a home loan is a long term loan commitment for the tenure of 15 years to 30 years. In such a long term, there are higher possibilities of unforeseen events which may happen in the life of the borrower; hence a home loan insurance helps to secure the future of a family of the borrowers. In situations where the loan amount is outstanding, the home loan insurance helps to pay the balance amount and thus prevents the seizing of the home.
Significance of home loan insurance for the lenders: A home loan insurance not only protects the buyers from the financial crisis of selling the asset against which a home loan is taken, but it is beneficial for the lenders as well. Banks or any financial institution not only want that its credit should turn into bad debts but they also want to prevent themselves from the complexities of selling the house and recovering the loan amount at the time when the rates of the house are continuously fluctuating. Presently, the home loan interest rate starts at 7.15%.
How can you take home loan insurance? Home loan insurance is taken from the banks or the non-banking institutions along with the home loan. Banks usually have a single premium policy for the home loan insurance which means that the premium is added to the loan amount. For instance, if you have taken a home loan of Rs. 10 lakhs and taken a home loan insurance of Rs. 1 lakhs, then the total amount of home loan will be 11 lakhs, and the interest or EMI will be calculated on the 11 lakhs.
Different ways to insure your home loan: There are two methods to protect your home loan.
- Term Insurance: The term insurance taken to protect the home loan provides coverage against all the liabilities towards the home loan. The amount of home loan insurance cover remains the same and is given to the beneficiary of the borrower, who later pays to the bank or the lending institution.
- Separate home insurance: It protects the borrowers to pay the outstanding amount of home loan in case of any unforeseen situation like death or illness depending on the policy taken by the policyholder. The amount of coverage for home loan insurance gets reduced as the borrower pays the loan amount every month. Also, if the full amount is paid, then no coverage will be provided for home loan insurance.
Essential things you need to know about a home loan insurance:
- Taking home loan insurance is not mandatory, and the lending institutions provide insurance against riders like terminal or critical illness, accidental death, unemployment and disability. However, you must buy the insurance plans that suit your needs.
- Most of the home loan insurance plans provide coverage for the outstanding amount of the home loan during the tenure of the loan.
- Under Sec 80 C of the Income Tax Act, you can get tax benefits on home loan insurance premiums.
- You will not get coverage for a home loan insurance if the cause of death is suicide or any other natural reason.
- Home loan insurance policy may lapse in case of home loan transfer to other institutions.
Taking home loan insurance certainly clears the home loan debt if you are unable to pay the home loan in case of any emergency. Also, home loan insurance reduces the burden on the family of the borrower and prevents seizing of the house in which they are living.