Home Loan Insurance cover – Part 2

In continuation with the first part of this series, Home Loan Insurance cover – Part 1, i will share some of the insights on the various Home Loan insurance policies that are available and the advantages and disadvantages in them.

I spoke with atleast top 3 insurance companies on products that they had for the Home loan insurance. Unfortunately none of them actually had all the desired features that i had mentioned in the first part of this series.

They basically had 2 types of insurance policies

1. Single premium - In this product, the borrower pays a single premium amount that is determined by the insurance company and one is covered against any in eventuality in the future. The cover reduces over the tenure of the loan. The amount of premium that one needs to pay will depend on the age of the borrower and the amount of loan cover. While this is very convenient and caters to many of the desired features, the main disadvantage of this product is that the premium amount high for a bullet payment to be made upfront. In case one decides to repay the loan earlier than the contracted period, there is no refund of any premium paid and the additional premium paid becomes a waste. In case the duration of the loan increases/decreases this does have any inbuilt mechanism to pay for the additional cover or increase/decrease the duration of the cover.

2. Regular premium - There is another option for the borrower where one can pay the premium on a regular basis (Monthly, quarterly, Half yearly, Yearly). However, what came as a rude jolt to me was that the premium that one needs to pay is much higher than a term policy for the same duration and the fact that the cover reduces on an ongoing basis, the premium does not. In fact most of the agents and the company officials recommended the term policy instead of the Home Loan cover citing its poor features.

Thus in a nut shell, there is no decent Home Loan Cover policies in force today except for the single premium one which has its own disadvantages. The other workaround is to take multiple single premium policies of the duration of 1 - x years (x being the duration of the loan) of reducing amount in line with the outstanding with the bank for the home loan and closing each insurance as the time passes by.

Here is some related news More home loan borrowers opting for life cover

Home Loan Insurance cover – Part 1

Over the last 3-4 years, there has been a big boom in the real estate in India with everyone aspiring for their own home. Many of these homes would have been funded by home loans that banks and financial institutions would have provided. Also, the interest rates were low for the borrower to be able to borrow large sums of money from the bank/financial institutions.

In this series on Home loan insurance, we will look at the key features that should exist in an home loan insurance.

While, many would have crossed the first hurdle of owning an own home, it is important that one is able to hold on to the property that one has bought/invested in by ensuring that the default in the repayment of the home loan due to untimely death of the borrower does not jeopardize the ownership of the apartment. Given that the repayment of home loans would have typically ranged between 10 years to 20 years, it is important one needs to get insured specifically for the home loan so that an unfortunate event of death of the borrower, the financial security of the family is not affected whereby the family need not direct their savings towards paying off the outstanding loan.

So what are the typical features that should exist in the insurance of a home loan ?. I have tried to detail the key features of an ideal home loan insurance

1. The home loan insurance cover should ideally be a pure insurance cover where the sole purpose of the insurance should be to cover the home loan that one has taken.

2. The amount of cover should ideally be equal to the amount of the outstanding loan amount to be repaid by the borrower. Therefore, if one were to assume that the outstanding amount will gradually decrease as one starts to repay the loan, the amount of cover required should also gradually decrease. It is illustrated in a diagram as given below

Image extracted from http://www.iciciprulife.com

3. In the case of the decrease or increase in the tenure of the loan, the duration of the cover of the insurance policy must also be flexible that can be varied.

4. In the case of a premature closure of the loan, the amount of premium that one had paid till date should not have been more than the insurance premium required for covering the outstanding debt.

5. There should be a provision for considering critical illness that one might get during the course of the tenure of the loan.

6. Ideally one should get tax benefits for the premium paid for the policy and critical illness benefit rider.

7. Ideally, on survival at the end of the repayment of loan outstanding, no survival benefit need to paid to the borrower (insured person). This should not be mixed up with investment/saving and should purely be considered for the purpose of insurance only.

In the next part of this series, we will scan the market to see what types of home loan insurance policies exist and see the differences, commonalities between them.