Bank on your insurance cover than go for home loan cover
Home loan insurance, or any mortgage redemption insurance plan, is
inevitably part of a banker's sales pitch when extending sizable
long-term credit, such as a home loan. Though lenders insist on it, the cover may not be necessary if you have adequate life insurance.
Home loan insurance, or any mortgage redemption insurance plan, is inevitably part of a banker's sales pitch when extending sizable long-term credit, such as a home loan. These plans hedge the risk of loss in case the borrower dies during the loan term, especially an unsecured loan.
Abhijit Bose, head of retail assets and strategic alliance, Development Credit Bank, says the product is more important for the customer than the bank. "Banks have the collateral as security. Insurance is just a cushion. But, for the customer, a mortgage redemption plan is the sole protection."
However, you should know that, since the policy is a third-party product, the bank earns a commission for selling the plan. So, there might be situations when you don't require home loan insurance and it is still sold as matter of procedure.
At the heart of it, mortgage redemption insurance is like any other life insurance term plan. The difference is that, instead of paying your nominee, the insurer settles the claim with the bank to close the loan on the policyholder's behalf. In a term cover, the money would be given to your nominee or the legal heir, who would then have to settle the loan with the bank.
So does that mean that, if you have sufficient sum assured under a term cover, you do not need a mortgage redemption plan? The answer is yes. Term insurance covers can not only be a replacement for home loan insurance policies, but is a better option in some cases.
POLICY COVER
Most home loan insurance plans provide a reducing cover. That is, the cover size is linked to your outstanding loan amount and the sum assured reduces along with the liability as one repays the loan.
In contrast, term plans have a fixed benefit. The nominee gets the full amount, no matter at which point of the policy tenure the claim is made. This money is used to pay off the bank debt and the balance can go to the borrower's family.
A few loan plans also give a constant cover but are typically costlier than standard loan insurance plans. In fact, if we do a comparison, home insurance covers are costlier than term plans in general.
Also, term plans are life insurance products and are easier to compare as all of them provide the same death benefit. Premium, riders and sum insured options are the standard factors for evaluation.
On the other hand, mortgage redemption covers are offered by both life and general insurers and the products sold vary.
While the ones sold by life insurance companies are long-term covers, general insurance companies provide policies that have to be renewed annually. There is also a difference in how they package these products.
For instance, Home Assure, the home loan insurance cover offered by ICICI Prudential Life insurance, is a simple 'no-frills' policy that promises to pay the outstanding loan if the policyholder dies.
In comparison, the Home Safe Plus plan from ICICI Lombard General, has additional features such as disability protection, cover for the home and contents and an add-on critical illness cover. It is also, therefore, costlier.
PREMIUM PAYMENTS
The basic underwriting for both term covers as well as loan insurance is based on the same factors- age of the policyholder, medical history, tenure of the policy and sum insured. Additionally, loan insurance takes the interest rate into account to calculate the policy premium. A few companies also have a different rate for metropolitan and non-metro areas.
It is the premium paying term that results in a difference in cost. Term plans are regular premium plans and charge you annually. A mortgage insurance plan is often a single premium plan that charges you a lump sum at the beginning of the term. When you pay a lump sum, you lose the interest that you could have earned on the money you paid as advance premium.
"The bank may even offer a discount if you pay a lump sum as premium. The offer looks lucrative on the face of it but you are losing money every year," says Malhar Majumdar, a CFP and executive director, Fine Advice, a Kolkatabased financial advisory firm.
Another disadvantage of paying a single lump sum premium is if you want to close your home loan. You will not be refunded the advance premium that you paid. Also, there could be issues in porting the plan if you want to transfer the loan to another bank.
However, a few plans, such as IDBI Federal Life's Homesurance and Kotak Life's Loan Protection Plan, also come with a regular premium paying option that can be paid in intervals. But you might have to pay more here.
For instance, for a 30 year old who has taken a loan of Rs 30 lakh for a tenure of 20 years, Kotak Life's Loan Protection single-premium plan will cost Rs 79,004. The same plan in the regular premium version charges a yearly premium of Rs 10,970. So, for 20 years it adds up to about Rs 2.19 lakh. The plan also has half-yearly, quarterly and monthly payment options that work out to be even more costly.
There is another alternative. For those who cannot pay the hefty single premium upfront, banks offer to pay the premium on your behalf and club it with the loan amount.
So, if your loan is of Rs 30 lakh and the premium to insure it is, say, Rs 50,000, your total debt will be the sum of the two or Rs 30.5 lakh. The equated monthly instalments (EMI) will be calculated on this amount.
However, you'll have to forego tax benefits on the policy premium if you choose this option. Those who pay the premium for a term plan or loan insurance are entitled to claim tax benefits under Section 80(C) of the Income Tax Act. But if your premium is fused with the EMIs, you cannot claim a tax deduction on the insurance plan's premium.
Also, financing the premium makes the plan costlier. HDFC Life Home Loan Protection Plan's single premium option costs Rs 81,335 to cover a loan of Rs 30 lakh with a payback period of 20 years (if taken by a 30 year old). In comparison, if you get the premium financed, it will cost Rs 83,602.
Where you buy the product from also makes a difference. For instance, Citibank offers the Birla Sun Life Insurance's Group Asset Assure Plan, which gives its customers a special group premium rate that is lower than what you would have to pay if you had bought an individual life insurance policy from the same insurer.
So, ensure that you consider all these factors and calculate your net cost before you choose to sign up for a home loan cover.
Abhijit Bose, head of retail assets and strategic alliance, Development Credit Bank, says the product is more important for the customer than the bank. "Banks have the collateral as security. Insurance is just a cushion. But, for the customer, a mortgage redemption plan is the sole protection."
However, you should know that, since the policy is a third-party product, the bank earns a commission for selling the plan. So, there might be situations when you don't require home loan insurance and it is still sold as matter of procedure.
At the heart of it, mortgage redemption insurance is like any other life insurance term plan. The difference is that, instead of paying your nominee, the insurer settles the claim with the bank to close the loan on the policyholder's behalf. In a term cover, the money would be given to your nominee or the legal heir, who would then have to settle the loan with the bank.
So does that mean that, if you have sufficient sum assured under a term cover, you do not need a mortgage redemption plan? The answer is yes. Term insurance covers can not only be a replacement for home loan insurance policies, but is a better option in some cases.
POLICY COVER
Most home loan insurance plans provide a reducing cover. That is, the cover size is linked to your outstanding loan amount and the sum assured reduces along with the liability as one repays the loan.
In contrast, term plans have a fixed benefit. The nominee gets the full amount, no matter at which point of the policy tenure the claim is made. This money is used to pay off the bank debt and the balance can go to the borrower's family.
A few loan plans also give a constant cover but are typically costlier than standard loan insurance plans. In fact, if we do a comparison, home insurance covers are costlier than term plans in general.
Also, term plans are life insurance products and are easier to compare as all of them provide the same death benefit. Premium, riders and sum insured options are the standard factors for evaluation.
On the other hand, mortgage redemption covers are offered by both life and general insurers and the products sold vary.
While the ones sold by life insurance companies are long-term covers, general insurance companies provide policies that have to be renewed annually. There is also a difference in how they package these products.
For instance, Home Assure, the home loan insurance cover offered by ICICI Prudential Life insurance, is a simple 'no-frills' policy that promises to pay the outstanding loan if the policyholder dies.
In comparison, the Home Safe Plus plan from ICICI Lombard General, has additional features such as disability protection, cover for the home and contents and an add-on critical illness cover. It is also, therefore, costlier.
PREMIUM PAYMENTS
The basic underwriting for both term covers as well as loan insurance is based on the same factors- age of the policyholder, medical history, tenure of the policy and sum insured. Additionally, loan insurance takes the interest rate into account to calculate the policy premium. A few companies also have a different rate for metropolitan and non-metro areas.
It is the premium paying term that results in a difference in cost. Term plans are regular premium plans and charge you annually. A mortgage insurance plan is often a single premium plan that charges you a lump sum at the beginning of the term. When you pay a lump sum, you lose the interest that you could have earned on the money you paid as advance premium.
"The bank may even offer a discount if you pay a lump sum as premium. The offer looks lucrative on the face of it but you are losing money every year," says Malhar Majumdar, a CFP and executive director, Fine Advice, a Kolkatabased financial advisory firm.
Another disadvantage of paying a single lump sum premium is if you want to close your home loan. You will not be refunded the advance premium that you paid. Also, there could be issues in porting the plan if you want to transfer the loan to another bank.
However, a few plans, such as IDBI Federal Life's Homesurance and Kotak Life's Loan Protection Plan, also come with a regular premium paying option that can be paid in intervals. But you might have to pay more here.
For instance, for a 30 year old who has taken a loan of Rs 30 lakh for a tenure of 20 years, Kotak Life's Loan Protection single-premium plan will cost Rs 79,004. The same plan in the regular premium version charges a yearly premium of Rs 10,970. So, for 20 years it adds up to about Rs 2.19 lakh. The plan also has half-yearly, quarterly and monthly payment options that work out to be even more costly.
The discount on a lump sum premium for a home loan insurance policy looks lucrative on the face of it, but you are losing money every year.
Malhar Majumdar
CFP and Executive Director, Fine Advice
So, if your loan is of Rs 30 lakh and the premium to insure it is, say, Rs 50,000, your total debt will be the sum of the two or Rs 30.5 lakh. The equated monthly instalments (EMI) will be calculated on this amount.
However, you'll have to forego tax benefits on the policy premium if you choose this option. Those who pay the premium for a term plan or loan insurance are entitled to claim tax benefits under Section 80(C) of the Income Tax Act. But if your premium is fused with the EMIs, you cannot claim a tax deduction on the insurance plan's premium.
Also, financing the premium makes the plan costlier. HDFC Life Home Loan Protection Plan's single premium option costs Rs 81,335 to cover a loan of Rs 30 lakh with a payback period of 20 years (if taken by a 30 year old). In comparison, if you get the premium financed, it will cost Rs 83,602.
Where you buy the product from also makes a difference. For instance, Citibank offers the Birla Sun Life Insurance's Group Asset Assure Plan, which gives its customers a special group premium rate that is lower than what you would have to pay if you had bought an individual life insurance policy from the same insurer.
So, ensure that you consider all these factors and calculate your net cost before you choose to sign up for a home loan cover.
