Bank on your insurance cover than go for house loan cover
When issuing large amounts of long-term credit, such as a home loan, home loan insurance, or any mortgage redemption insurance plan, is unavoidably included in a banker’s sales pitch. Even though lenders require it, you may not need it if you have appropriate life insurance.
When issuing large amounts of long-term credit, such as a home loan, home loan insurance, or any mortgage redemption insurance plan, is unavoidably included in a banker’s sales pitch. These plans protect the lender from loss if the borrower dies during the loan term, especially if the loan is unsecured.
According to Abhijit Bose, Development Credit Bank’s head of retail assets and strategic partnership, the product is more significant to the client than the bank. “Collateral is used by banks as a form of security. Insurance is merely a safety net. A mortgage redemption plan, on the other hand, is the only safeguard for the customer.”
You should be aware, however, that because the policy is a third-party product, the bank receives a commission for selling it. As a result, there may be times when you don’t need home loan insurance but it is nonetheless sold as a matter of course.
Mortgage redemption insurance is essentially the same as any other term life insurance coverage. The distinction is that, rather than paying your nominee, the insurer settles the claim with the bank on the policyholder’s behalf to close the loan. In a term insurance policy, the money would be given to your nominee or legal heir, who would then be responsible for paying off the bank loan.
So, if you have a significant sum assured under a term insurance policy, you don’t need a mortgage redemption plan? Yes, it is correct. Term insurance is not only a good substitute for house loan insurance, but it can also be a better solution in some situations.
COVERAGE OF POLICY
The majority of home loan insurance policies include a lowering cover. That is, the extent of the cover is determined by the amount of the outstanding loan, and the sum assured decreases when the loan is repaid.
Term plans, on the other hand, have a fixed benefit. Regardless of when the claim is submitted throughout the policy’s term, the nominee receives the whole amount. The money will be used to pay off the bank loan, with the remaining funds going to the borrower’s family.
A few loan plans provide constant coverage as well, but they are usually more expensive than regular loan insurance plans. In fact, when we compare home insurance policies to term plans, we find that home insurance policies are generally more expensive.
Term plans are also life insurance products, which make them easier to compare because they all have the same death benefit. The standard factors for evaluation are the premium, riders, and sum insured options.
Mortgage redemption insurance, on the other hand, is offered by both life and general insurers, and the policies available differ.
While life insurance firms sell long-term plans, general insurance businesses sell policies that must be renewed every year. There’s also a distinction in the way these products are packaged.
For example, ICICI Prudential Life Insurance’s Home Assure home loan insurance coverage is a straightforward ‘no-frills’ policy that guarantees repayment of the outstanding loan if the policyholder passes away.
In comparison, the ICICI Lombard General House Safe Plus plan includes extra benefits such as disability protection, home and contents coverage, and a critical illness add-on. As a result, it is also more expensive.
PAYMENTS FOR PREMIUM SERVICES
The basic underwriting for both term and loan insurance is based on the same factors: the policyholder’s age, medical history, policy tenure, and sum insured. In addition, when calculating the policy premium for loan insurance, the interest rate is taken into account. A few businesses also charge varying rates for metro and non-metro locations.
The variation in cost is due to the premium-paying term. Term plans are annual premium plans that bill you every year. A single premium mortgage insurance plan is one that charges you a lump sum at the start of the term. When you pay a lump sum, you forfeit any interest gained on the money you paid as an advance premium.
“If you pay your premium in one lump amount, the bank may even give you a discount. On the surface, the deal appears to be attractive, but you’re losing money every year,” says Malhar Majumdar, a CFP and executive director of Fine Advice, a financial advisory firm located in Kolkata.
If you want to close your home loan, paying a single lump sum charge has another disadvantage. The advance premium that you paid will not be reimbursed. Also, if you want to transfer the loan to another bank, there may be complications with moving the plan.
A few plans, such as IDBI Federal Life’s Home Insurance and Kotak Life’s Loan Protection Plan, do, however, include a regular premium payment option that may be paid in instalments. However, you may have to pay a higher price here.
For example, Kotak Life’s Loan Protection single-premium plan will cost Rs 79,004 for a 30-year-old who has taken a loan of Rs 30 lakh for a 20-year term. A yearly premium of Rs 10,970 is charged for the identical plan in the normal premium version. So, over the course of 20 years, it comes to around Rs 2.19 lakh. Half-yearly, quarterly, and monthly payment options are also available, although they are all more expensive.
On the surface, the reduction on a lump sum cost for a house loan insurance policy appears attractive, but you are losing money every year.
Malhar Majumdar, CFP, Fine Advice’s Executive Director
There is a different option. Banks offer to pay the large single premium on your behalf and combine it with the loan amount for people who cannot afford to pay it ahead.
So, if your loan is worth Rs 30 lakh and your insurance premium is worth Rs 50,000, your total debt will be Rs 30.5 lakh. This amount will be used to calculate the equivalent monthly instalments (EMI).
If you choose this option, you will have to forfeit tax benefits on the policy premium. Section 80(C) of the Income Tax Act allows those who pay the premium for a term plan or loan insurance to receive tax benefits. However, if your payment is combined with your EMIs, you will not be able to claim a tax deduction for the insurance premium.
Furthermore, borrowing the premium increases the plan’s cost. The single premium option of the HDFC Life Home Debt Protection Plan costs Rs 81,335 to cover a loan of Rs 30 lakh with a 20-year payback period (if taken by a 30 year old). In comparison, the premium will cost Rs 83,602 if you finance it.
It also makes a difference where you acquire the merchandise. Citibank, for example, offers the Birla Sun Life Insurance Group Asset Assure Plan, which offers consumers a special group premium cost that is cheaper than what you would pay if you bought a life insurance policy from the same insurer individually.
So, when you sign up for a house loan insurance policy, make sure you analyze all of these considerations and compute your net cost.