Getting A Home Loan? Here’s Why You Should Opt For Home Loan Insurance

In 2010, Ganesh Shirke, a 37-year-old bright employee of an advertising firm, worked very hard to put together a down payment for a two-bedroom-hall-kitchen apartment in Dombivli, a far-off Mumbai suburb. As his career prospects were good and he had gone up two levels in two years in his firm, he was pretty sure that paying a hefty EMI of Rs 50,000 would not be a problem.

But just as the family moved into their new home, tragedy struck and Ganesh met with an accident, leaving him paralysed. His wife was at a loss as to how to pay the EMI as they had two young children to look after and she only earned by giving music lessons. Today, the Shirkes deeply regret not having taken the home loan insurance that was recommended by their lender. At that time, they had dismissed it as a marketing gimmick of the bank, but later realised that home loan insurance could have saved them from the trouble they are in today. For those who are not aware of it, let us tell you home loan insurance plans mitigate the risks associated a long-term financial burden of a home loan.

What is covered under home loan insurance?
Usually, the entire loan amount is covered under such policies. But in some cases, there might be a limit as to how much the insurer will cover. The death of the borrower or a permanent disability due to any illness or accident is covered under home loan insurance. Some companies even cover a job loss for a short period of time, ranging from 1-3 months.

Although the home loan insurance is similar to a life insurance product, the sum insured usually reduces with the reducing outstanding loan. However, some insurers offer a pre-determined flat sum irrespective of the outstanding loan balance. The other dissimilarity with life insurance products is that unlike term policies, home loan insurers do not pay the sum insured if the borrower is alive beyond the term of the policy.

How to avail of home loan insurance and how it impacts your home loan eligibility
Anyone who is eligible for home loan is also considered eligible for home loan insurance. Once you indicate that you are interested in home loan insurance, the bank will sanction the loan amount, along with the insurance amount, after it is subjected to 90% (or 80%, if the value of the property is more than Rs 20 lakh). In other words, your home loan eligibility is calculated after taking into consideration your insurance premium instalment. Once the premium is calculated, it is split into small amounts and added to your EMI. But do remember as the bank is paying your premium amount in full to the insurer (while you pay a small amount over and above your EMI throughout the tenure of the loan), you are effectively paying an interest on the premium amount as well.

Calculation of premium
The premium amount on your home loan varies according to loan tenure, the amount taken and the age of the borrower. The higher the loan tenure, the higher is the premium. Similarly, the higher the age of the borrower, the higher is the premium amount. If the borrower is over 40 years of age, a health check becomes mandatory. If you are suffering from medical conditions like heart problem or diabetes, the premium you need to pay will be a little higher.

In case of any unfortunate incident, members of your family must file a claim by making a written application, along with all relevant documents (death certificate, medical certificate, etc.). After examining these documents, the insurer will pay the amount to the bank or to the nominee in your insurance policy. If you are working so hard to take a home loan, it does make sense to walk that extra mile and opt for the home loan insurance to avoid all future hazards.

About the author: Rajiv Raj is the Director and Co-founder of www.creditvidya.com.