Taking Insurance With Home Loan? Read This First...

Rajeev Mishra, a middle management professional at a private sector firm in Delhi, wanted to transfer a home loan he had taken a few years ago as the interest being charged was higher than what’s available in the market and he also needed a top-up loan. With zero prepayment charges, discounted processing fees and top-up loans available with the home loan itself, along with balance transfer, Mishra thought he had a real opportunity to save money.

However, he had a shock when he realised that the life insurance cover he paid for and bought along with his existing home loan to ensure that his family wasn’t saddled with loan repayment in case of an unfortunate incident was not transferable. The reason the policy could not be transferred is that Mishra had only paid to become a member of a master policy that his bank had subscribed to and the policy stated that the cover would cease when the loan is refinanced, among other reasons. Now, there’s hardly any customer who reads this fine print in the insurance policy and there probably isn’t a sales executive who ever bothered to explain this to a customer.

It means Mishra will have to buy another insurance cover and the current insurance company would, at best, pay him a cash surrender value for the residual tenure of his existing single-premium policy.

This raises a dilemma that a lot of home-loan borrowers in India may not even be aware of. Should they or should they not buy an insurance with a home loan without restricting the future ability to shift the loan?

Here’s a solution. Since buying life insurance with a home loan is surely a wise thing to do, people should surely do so. But instead of buying the insurance from the home loan provider, the customer may simply buy a term plan online (either single premium or annual premium) and the members of his/her family should become the beneficiaries. This way, all objectives will be met:

1. The customer’s life is insured.
2. The family will not be burdened with loan repayment in case of an unfortunate incident.
3. The customer can freely change home loan provider if he/she wishes to.

Another solution could be the regulatory intervention by the RBI and the IRDA to ensure that life policies sold by banks, along with long tenure loans like home loans, should be transferable from one lender to another (as beneficiary) as the customer is paying for these. However, complementary policies paid by the banks could possibly be exempted from this transferability requirement. In the absence of such a regulation, the entire effort to protect customer interest by making loan takeovers easy is likely to get compromised.

This article is written by Gaurav Gupta.
About the author: Gaurav Gupta is the founder and CEO of Myloancare.in that focuses on helping individuals and SMEs manage their loans better.

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