Buying a home is one of the biggest dreams for millions of families. However, owing to the continuous volatility of the economy, especially in the past few years, it cannot always be an easy task to purchase a home of your choice. There are various ongoing financial commitments in one's life, especially for people with familial responsibilities.
Hence, purchasing a home on your own by making a one-time payment can be difficult and also not the best decision since it may eat up all your liquid funds. So, the other option can be a home loan. A home loan ensures you have sufficient funds to meet the requirements and purchase a home without compromising your expectations.
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When it comes to home loans, you must have heard that purchasing home insurance is also needed. Well, as per the Reserve Bank of India, IRDAI, home insurance against home loans is not mandatory. It is completely under your discretion, and a financial institution cannot force you to invest in property insurance.
What lenders may demand?
When you plan to get a home loan, the lender may ask you also to get home insurance. Although you are expected to protect the financial interests of the lender, remember that you are not obliged to do so. In some cases, people may experience rejection of home loans when a home insurance policy is not purchased. This is primarily because in case the insured property gets damaged/destructed due to unforeseen events or the loan borrower dies, the lender may suffer loss.
To help cover these expected losses, the lender may ask you to also invest in a home insurance plan along with purchasing a home loan. A few lenders may offer you to purchase home loans and home insurance under a single premium. Under such a plan, you do not feel the additional burden of paying home insurance premiums.
Understanding home loan insurance premiums
Insuring your home loan is an easy task with the right insurer. There are broadly two options, and you may choose to invest in one as per your choice:
1. Home loan insurance
If you already have an existing home loan and want to get an insurance cover for it, you may go for the option of home insurance against a home loan. It is a separate insurance plan that offers protection of home loans against unfortunate incidents. The coverage remains almost the same as that of single-premium home insurance. Here, you need to pay the premium separately, like any other insurance plan.
2. Single-premium home insurance plans
As discussed above, you may opt to invest in a home loan and home insurance under a single premium without paying separately for each. Let's understand this with the help of an example:
Reeti Varma, a 32-year-old software professional, is seeking a home loan of ₹30 lakhs, which she is planning to repay within 15 years. So, to get protection for ₹30 lakhs home loan for 15 years, Reeti needs a home insurance cover of ₹3,300 premium per year for 15 years, which makes it a total of ₹49,500.
In this scenario, the lender may offer a single premium payment plan for home insurance at ₹38,000. This amount is added to the home loan, which slightly increases your EMI. With this plan, you do not feel the burden of paying home insurance premiums separately but get it covered at a nominal EMI.
There are certain things about a single premium home loan insurance plan that you need to keep in mind. These are:
- You cannot choose to change your insurer until the loan is fully paid.
- There is no maturity benefit under this plan. The property insurance amount keeps decreasing as the loan amount decreases. Once the loan is paid, the home insurance policy lapses as well.
3. Term insurance
It is at the complete discretion of the home loan borrower whether they want to invest in home insurance or not and the type of home loan insurance they opt for. If you do not want to invest in home insurance, you can also simply invest in term insurance that helps your nominee pay off the home loan in case of your untimely death.
What should you do?
Once you know that property insurance is not mandatory but under your discretion, you need to take a call. The reason why people invest in home insurance is to help the lender recover the loan amount through insurance coverage in case the borrower dies or the property faces some legal or destruction issues.
If you do not opt for home insurance, there may be an impact during unforeseen events. For instance, if the borrower dies, the burden of loan repayment falls on the surviving family members. On the other hand, if the property gets damaged or destroyed, the loan is eventually wasted. In either case, repayment of the EMI loan can become a huge burden. To cover such losses, it is better to invest in a home insurance policy. With a small premium, you can easily tackle the most difficult of situations.
Tax benefits
Home insurance, like other general insurance, offers tax benefits under the Income Tax Act of 1961. The policyholder can enjoy tax deductions up to ₹1.5 lakhs under Section 80C of the Income Tax Act of 1961 for paying the premium of home insurance.
However, if you club home insurance premium in the home loan amount, that is, single-premium home loan insurance, there is no tax benefit. Tax benefits can only be availed when you purchase a separate home insurance plan.
Home loan insurance vs property insurance
Home insurance, sometimes called property insurance, is to cover your house or property. It offers coverage to the building and/or its contents. Home loan insurance basically covers your loan. Let's understand the differences:
- Home loan insurance is the protection purchased to cover the home loan amount. In this context, the home loan insurance cover comes into role play in case the borrower dies, or the home gets damaged/destroyed.
- Property insurance, on the other hand, can be purchased to protect the home and/or its contents, depending on the insurance you purchase. Under such a policy, there is no cover for the home loan but only for the existing property. It is a comprehensive plan that protects against natural calamities, theft, etc.
Conclusion
Financial burdens can pause your life, and you may also lose on essential requirements. To avoid such a future incident, planning today is important. You may choose to invest in home insurance against a home loan as per your preference. You have the option to invest in a single premium plan or a term insurance plan without any hassle.
Note: The above information is for illustrative purposes only. For more details, please refer to the policy wordings and prospectus before concluding the sales.
Disclaimer - The above content is non-editorial, and TIL hereby disclaims any and all warranties, expressed or implied, relating to it, and does not guarantee, vouch for or necessarily endorse any of the content.
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- Published On Jan 11, 2024 at 02:30 PM IST
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