Borrowers worry about what would happen if something happens to them in the near future, and who will have to pay the remaining balance on their house loan. Consumers do not want their loved ones to bear the financial burden of obtaining a mortgage in the event of their untimely death. Because a house loan might last for up to 30 years, the borrower begins to link the phrase “unpredictability” with the loan. Borrowers, therefore, should bear this in mind and arrange their finances in accordance with it. However, home loan insurance is not required by any lender, including banks, NBFCs, or housing finance firms, when taking out a loan for any purpose.
A house insurance plan is not required by regulatory organisations such as the RBI and IRDAI if a borrower is taking out a home loan from any financial institution. HLPP (House Loan Protection Plan) is a plan offered by nearly every financial institution that pays the borrower’s outstanding or balance home loan amount to the lender or bank in the event of unforeseen circumstances, such as the borrower’s death. This may include the borrower’s demise.
Home Loan Insurance Types
Level Plan, Hybrid Plan, and Reducing Cover Plan are three forms of home loan insurance offered by lenders.
The insured’s protection stays constant throughout the term of the loan under a level cover plan.
Hybrid Coverage: The first year’s coverage is complete. As the remaining balance is depleted over time, it begins to decline.
Reducing Coverage: As the loan term lengthens, so do the coverage and the outstanding loan balance.
If a borrower hasn’t previously paid for term insurance, he or she can take advantage of home loan insurance. There is no way to compare the specific elements of term insurance and house loan insurance, but there are certain similarities in terms of the intended use or advantages that may be drawn upon. Borrowers who have a mortgage should consider getting home loan insurance to protect their loved ones in the event of an unforeseen event. It is, of course, entirely optional to obtain mortgage insurance. The majority of people will still think about it before applying for a house loan from any lender, though.
What are the options for securing a mortgage?
You may insure your house loan in one of two methods. They include:
All of your assets and obligations are protected by term insurance. Term life insurance has a lot of advantages, including the following:
Dependants of the borrower will get a set amount of money rather than a reduced amount in the case of the borrower’s death due to term insurance.
Changing interest rates may need an adjustment to the EMI schedule. An extension in the term of the house loan will not be covered by a standard home loan protection plan. Your home loan will not be affected if you switch lenders during the term of your insurance. If you have term insurance, even if you default on your mortgage, you will always be covered as long as you keep paying your premiums.
The borrower’s outstanding house loan is protected in the case of his or her death or disability by a Separate Home Insurance policy.
Which is better for protecting your house loan: term insurance or home loan insurance?
Aspiring to buy a house of your own is a common goal for many people. However, if you’ve ever taken out a house loan, you may have had to deal with lenders trying to sell you some kind of home loan protection plan at the time of loan approval. Mortgage insurance, or house loan insurance, is not regulated by any regulatory authority, but lenders urge that you purchase a home loan insurance to protect yourself against credit or lending risks.
Home loan insurance doesn’t cover solely lenders. It’s also good for you, the borrower. Even if the lender dies before paying off the house loan in full, a clause in the mortgage insurance policy may enable the insurance policy payment of the remaining debt to the lender to be made.
Term vs. Mortgage Insurance: Which Is Better?
Term insurance and a separate home loan protection plan are two options for guarding against loan payback hazards. A death benefit from a term insurance plan will be paid to your heirs or beneficiaries, who can then use the money to pay down the balance of the debt. After the Union Budget 2019 address by Finance Minister Nirmala Sitharaman, borrowers of loans on property valued up to Rs 45 lakh can now claim an extra benefit of up to Rs 1.5 lakh under Section 80EEA for interest paid on loans up to Rs 2 lakh under Section 24B. Tax benefits of up to Rs 1.5 lakh can also be claimed under Section 80C, which includes home loan principal and term insurance premiums. Thus, if your 80C tax advantages have not been fully utilised, a second term insurance policy for home loan protection might be used to accomplish the same.
Low-cost insurance policies with no maturity benefit are known as term plans. Depending on the terms and circumstances of the policy, mortgage insurance and term insurance may appear comparable in terms of cost and add-ons such as critical sickness coverage, disability coverage, unemployment coverage, etc. Both have no advantage in terms of maturity. However, there are several differences between the two. Consider a few of them before you make a final selection.
What’s the best option for you?
Term insurance costs less than a separate loan protection plan since it doesn’t have to be put on to the whole loan cost, which may be expensive. A term plan is an insurance policy that provides a death benefit that can be utilised for any purpose. A house loan insurance policy, on the other hand, solely covers the remaining balance of the loan. As the loan is repaid, the sum guaranteed will decline until it reaches zero at the end of the policy period.
While it is possible to refinance or amend the term of a house loan to better fit your financial situation, the existing home loan insurance coverage cannot be modified. In addition, home loan protection policies do not provide for insurance portability if you decide to move lenders. Term plans allow you to enhance your life insurance coverage to include the sanctioned loan amount, while home loan protection policies do not allow this. The one-time price you paid for home loan insurance will not be reimbursed if you decide to foreclose on the loan.