Do not adjust for the home loan liability into the existing term cover as it will compromise with your family needs.
Picture this: You walk into a bank branch to get a home loan. You have given the bank all of the necessary documents and your credit score is good. However, the lender is adamant that you do one more thing – get an insurance plan as well. Some will go to the extend of saying that you will not get the home loan unless you buy an insurance plan as well.
Although it is essential to buy an insurance cover while taking a loan you are under no obligation to do so, not from any bank nor non-banking finance company. “It is not mandatory to purchase home loan protection plans. Neither the law nor the regulatory bodies such as RBI or IRDAI have made the purchase of home loan protection plan with a loan mandatory. Purchasing an insurance plan is the sole discretion of the buyer and borrowers cannot be forced to purchase such plans,” says Adhil Shetty, CEO, BankBazaar.com. You can buy the cover from any life insurance company, independent of the lender.
What the lender asks for
Generally, lenders insist that you buy a single premium term insurance plan to take care of the liability. To sweeten the deal, they offer to add the single premium amount to the loan. So, in a way, the borrower does not have to pay anything upfront and still get the loan insured. As a result, the equated monthly instalment (EMI) amount increases a bit without pinching the pocket much.
What’s the premium?
Let’s see if someone wants to cover a Rs 30 lakh loan for 15 years and looks to buy a term insurance plan. On an average the annual premium for Rs 30 lakh for 15 years is Rs 3,200, i.e., a total of Rs 48,000 will be paid over 15 years. Instead, the single premium comes at Rs 34,000 for a cover for 15 years. Ask the lender to share the premium figure and compare it with those from life insurance companies and then take a call accordingly.
Getting the loan covered
Taking a home loan adds to one’s liability. In case of death of the borrower, the liability to pay off the loan falls on the surviving family members. Having an insurance cover will serve the purpose and help meet the financial liability. In such a situation, a term insurance plan, which is a pure risk cover plan, suits the most as they are low-cost, high-cover plan with no maturity value.
Without increasing the EMI considerably, the deal looks fine. However, remember, there will not be any tax benefit available to you on the premium amount. In case you buy a term insurance plan, the premium paid qualifies for section 80C tax benefit. “Also, if they are a single premium policy bundled with your home loan, you would not be able to port your insurance plan if you ever switch your lender,” informs Shetty.
Handling the situation
At times, lenders may refuse to give you the loan unless one gets it through them. You might give in as restarting the entire exercise of searching the right lender can be rather tedious. So, what do you do in such a situation? “If you are being pressurised to purchase a home loan cover for the home loan, communicate to the lender that you know that it is not mandatory to buy home loan cover to get a home loan. Also, request them to give a written document that home loan cover is mandatory to get a home loan. This will deter them from pushing any non-mandatory products,” says Shetty.
If the lender is still adamant and not willing to sanction the loan amount, it’s better to approach the higher officials of the bank. “Reach out to the senior management in the bank regarding the matter. If none of this helps, you also have the option to raise a complaint to the Banking Ombudsman following proper procedure,” says Shetty.
What you should do
If you already have a term insurance plan then top it up with an amount equal to that of the home loan. Do not adjust for the home loan liability into the existing term cover as it will compromise with your family needs. Ideally, one should have a cover of at least 10 times of one’s income. So, if you already have a Rs 80 lakh term insurance cover and the loan is of Rs 30 lakh, then get an additional cover equal to the loan amount, i.e., Rs 30 lakh.
However, if you do not have a term insurance plan, estimate the total amount that your family would need including the home loan liability, and then buy it the day you have the loan sanctioned. In the above example, one needs to get a cover of Rs 1.1 crore to meet the protection needs of the family and to cover the loan. Remember, the additional cover will only be for the tenure of the loan. Once the loan outstanding becomes nil or when it is paid off, drop the term plan earmarked towards it.[“Source-economictimes”]