Why do you need Insurance cover while taking a Home Loan/Mortgage Loan?

Buying an asset, especially a house, is one of the biggest decisions that you take in your lifetime. Apart from being a financial investment, a house is also an emotional investment. You put a lot of time and effort into finalizing the dream home. Since it is a big financial commitment, home loans are the most preferred way of securing financing. Home and mortgage loans mean a huge liability over a long period. And should something happen to the borrower, the repayment liability befalls the family. In such a circumstance, a home loan with insurance cover comes as a savior.

A home loan or a mortgage loan adds to a borrower’s liability. An insurance cover that protects a loan borrower is a hedge against the risk the lender carries in the event of the borrower’s inability to repay the loan. In the absence of a home loan/mortgage loan insurance cover, in case the borrower dies, the lender can sell or auction off the borrower’s assets to recover the outstanding amount. Thus, loan insurance protects the borrower's assets and collateral. In the event of the death of the borrower during the tenure, the insurance company will settle the outstanding loan with the bank.

What is the difference between Home Loan Insurance and Mortgage Loan Insurance?

Both home loans and mortgage loans are secured loans but there’s a difference between the two.

• Mortgage Loan Insurance: A mortgage loan is a loan that a borrower avails by pledging an immovable asset as collateral, a Loan against Property (LAP) for example. Here, the financing is secured on a property that the borrower already owns. There’s no restriction on the end use of this loan. And a mortgage loan insurance covers the liability of a borrower to repay the mortgage loan in case of death or disability.

• Home Loan Insurance: A home loan refers to securing financing for the specific purpose of buying or constructing a house. The collateral in this case is the intended house that remains the property of the lender until the loan is repaid. Home insurance covers the liability of a borrower to repay the home loan in case of death or disability.

The insurance policy on both could lapse upon the full repayment of the loan, after the demise of the borrower, or on the transfer of the loan to another bank.

Difference Between a Home Insurance and a Home Loan Insurance.

The basic purpose of an insurance policy is protection

Home Loan Insurance: As mentioned above, home loan insurance protects the buyer by safeguarding his/her assets in the event of death or disability causing his/her inability to repay the loan. It also protects the lender by hedging its risk of not receiving the balance loan repayment in case of death or disability of the borrower. The best home loan insurance cover is one that offers complete coverage of repaying the lender and protecting your family and assets in the event of a mishap.

There are two kinds of home loan insurance-

• Term Insurance: In this, all your liabilities and debts are taken care and your assets are protected as well.

• Separate Home Loan Insurance: In this, the insurer pays the lender the outstanding home loan directly for settling the loan.

Home Insurance: In the case of Home Insurance, the insurance cover typically safeguards the house, its contents, and valuables from natural and man-made calamities, thefts, and robberies.

The policy offers two covers

• Content Damage: Provides financial compensation if the contents of the house such as appliances and furniture get damaged.

• Structural Damage: Provides financial compensation if there is damage to the structure of the house.

6 Reasons Why you need Home Loan/Mortgage Insurance

Most financial companies like banks offer you loan insurance when you apply for a home loan with them. However, it is important to note that buying a home loan/ mortgage loan insurance is optional and a borrower cannot be forced to buy one. Also, home loan/ mortgage loan insurance protects the home loan or the mortgage loan, not the home or collateral itself.

Here are the top reasons you should get home loan/mortgage loan insurance.

• Protects Your Family: This is probably the single most important reason for you to take that home protection plan. Just like a life insurance policy that takes care of your family after you are gone, a home loan/ mortgage loan insurance dissolves your family from repaying the loan upon your death.

• Protects Your Assets and Collaterals: The lender has the full right to sell off your asset (a home in case of a home loan) or collateral (in case of a mortgage loan) to recover the balance loan amount. A loan with insurance cover shall protect your assets by way of balance loan repayment by the insurer to the lender.

• Easy Premium Payment Options: Most home loan insurances are single premium policies and most lenders incorporate the home loan insurance premium with the home loan EMI. This way premium is deducted along with the EMI.

• Tax Benefits: Home loan/mortgage loan insurance premiums are eligible for tax benefits under section 80 C. However, if you choose to pay the premium in installments rather than as a lump sum, you don’t get the tax benefit.

• Single Policy for Loan Co-Borrowers: Single home loan insurance covers all the borrowers in a joint loan.

• Additional Riders and Coverage: Most insurance providers today offering home loan insurance schemes provide optional add-ons like riders, life insurance, and additional coverage. The riders typically include terminal illness, accidental death, coverage of up to six EMIs due to job loss, and permanent disability. The cost of these riders would increase the premium amount. The life cover offered is usually equivalent to the home loan outstanding amount. As soon as the loan amount is repaid, the life cover comes to an end.

Things to Consider before taking a Home Loan/Mortgage Loan Insurance

There are a few things to be kept in mind while applying for a Home Loan/ Mortgage Loan Insurance that will hold you in good stead.

• Both of these policies can be bought from either a general insurance company or a life insurance company.
• Policies offered by general insurance companies have to be renewed every year and have lower premiums while the ones offered by life insurance companies give coverage for a longer tenure at a higher premium.
• The loan term and the insurance coverage duration must be the same. If you choose a shorter duration insurance cover, you might have to extend it later at a higher premium because the coverage depends on your age too.
• The policy could lapse in case of a home loan balance transfer, home loan restructuring, or full repayment of the loan amount.
• You should enquire extensively about the riders and add-ons and the charges for it.
• The current home loan insurance payment will not be sufficient to cover the loan amount if the loan term is extended as a result of a rise in interest rates.
• If you plan to foreclose your home loan/mortgage loan, it is advisable to buy a policy that is renewed annually to prevent this rather than a single premium policy.

A home loan or mortgage loan insurance cover is a great way of ensuring that your family is not troubled financially upon your demise. An asset like a house that you worked so hard for shouldn’t become a burden on them.