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Insure your home loan the right way

Insure your home loan the right way

Be careful when you sign the loan agreement as a bundled home loan insurance may lead to an additional interest burden.

The case
Bangalore-based IT-professional, Ravi Sarma, recently borrowed Rs25 lakh for purchasing a home. Had he paid attention while signing the loan agreement he would have realised that the total amount borrowed was Rs25.6 lakh. Only when a friend questioned the higher amount did he realise the problem, the home financing bank had sold him a home loan insurance policy worth Rs60,110 without his consent. When he argued with the relationship manager, he was told that this was mandatory as the bank’s loan had to be protected in the borrower’s absence too.

Additionally, Sarma is paying interest at the rate of 10.25% on this amount (home loan insurance premium) as well. Without the home loan insurance package, his EMI would have been Rs24,541, with a total outgo of Rs33.90 lakh on the 20-year home loan. He is now paying Rs25,131 as EMI and thus repaying an additional interest of Rs81,000.

An alternative avenue
A better option for Sarma would have been to take a term insurance policy to the extent of the loan outstanding amount. This is over and above the regular term insurance that you will need to support your family in your absence (ideally 10 times the annual income). A term policy is better because irrespective of the home loan amount repaid, your family will get the entire sum assured, of which they can repay the loan and use the balance for other requirements.

The advantages of term insurance
The premium payable on home loan insurance policies can be as high as three times the cost of term plans. This is also because single premium policies are costlier than annual premium policies. If you shift you home loan to another lender, the new bank would try to add in the insurance cover of the company with which it has a tie-up. For instance, HDFC bank would be selling home insurance from HDFC Life.

Downsides of bundled home loan insurance
If the loan terms are tweaked – under restructuring, for instance – the insurance policy will have to be altered too. If you pre-pay the home loan, the insurance premium may be refunded in limited cases, but not in most. Since home loan insurance is purchased as a single premium cover, you lose some of that money.

The bottom line
Be careful when you sign the loan agreement and ensure that you pay the home loan insurance premium from your own funds.

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