Home Loan Protection Plan Vs. Term Plan: Which Is Better?

In such cases, the financial burden of the unpaid home loan EMIs falls on the shoulders of your family members. A loss of the breadwinner of the family can put a family in financial turmoil. The family might have to lose the home or sell other assets to repay the unpaid home loan. To avoid your family suffering from such an incident, it is advisable to extend your Term Plan Cover or buy a Home Loan Insurance Plan that will cover your unpaid dues. This article will discuss which of these would be the right option for you.

In recent times, the banks and Housing Finance Companies (HFCs) have been being adamant about buying Home Loan Protection Plan when disbursing the loan. Some financial institutions even tell their customers that the loan will not get disbursed unless they buy the insurance from them. Is it really true? Do you have to buy home loan insurance to avail of a home loan?

Well, the simple answer to the question is - 'No'. You do not have to buy the Home Loan Protection Plan to get a home loan. Neither any law nor the Insurance Regulatory and Development Authority of India (IRDAI) that governs the insurance sector in the country has made it mandatory to buy a Home Loan Protection Plan while availing of a home loan. It is completely up to the borrower whether they want to buy it or not, and no bank or HFC can force them to buy any type of insurance.

Then why do the lenders ask you to buy the Home Loan Insurance?

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The lender bears the risk that the borrower experiences an unforeseen medical emergency or demise that could put the home loan repayment at risk. A home loan insurance plan provides financial protection to the lender as it ensures the unpaid loan amount is paid by the insurer. Apart from this, the banks and HFCs have tie-ups with insurance companies, who offer them commission or fees for every sale made through them. Hence, in order to earn a higher commission, many lenders insist on buying insurance to the borrowers.

Mostly, the lenders ask the borrowers to buy a single premium Home Loan Protection Plan or a Term Insurance Plan. The lenders typically increase the home loan amount to the premium amount so that the borrower does not have to pay from their pocket. The borrowers generally agree to it as they think it is mandatory, and a small amount of premium will not make much difference. However, as the loan amount increases, your total interest outgo and monthly instalment also increase. For example, if the home loan amount is 25 Lakhs and the one-time premium of a home loan insurance plan is Rs 2 Lakhs, the lender sanctions the loan of Rs 27 Lakhs. So, the premium of Rs 2 Lakhs is paid in EMIs.

What are the benefits of buying a Home Loan Insurance Plan?

1. Protects the Family:

Having an insurance cover gives the borrower peace of mind. In case of an unfortunate demise of the borrower, the family does not have to take the financial stress of repaying the huge loan amount as the insurance company takes care of it. However, in the absence of an insurance cover, the lender can seize the collateral/home if the family fails to repay the loan.

2. Protects Your Assets:

In your absence, the lender might have to seize the house and other valuables to recover the dues. Even if your family manages to repay the loan by selling their other valuables or breaking the investments, it is still a loss for your family. The home loan insurance policy ensures your family does not have to sell off any assets or break any investments so that they can continue living the same lifestyle.

3. Easy Premium Payment:

If you cannot afford to pay the premium of the home loan insurance policy, the bank or HFC will add it in the home loan amount, and you can pay it through monthly instalments with your home loan.

4. Tax Benefit:

The premium you pay for Home Loan Insurance is eligible for tax deduction under Section 80C of the Income Tax Act 1961.

Which is a better option: A Term Insurance Plan or a Home Loan Insurance Plan?

Under the Home Loan Protection Plan, the sum assured reduces with the loan amount, and in case of an untimely demise of the borrower, the outstanding loan amount is paid to the bank. The tenure of the policy remains the same as the loan tenure. However, in the case of term life insurance, the sum assured remains constant, and you can choose the policy term as per your requirement.

A Home Loan Protection Plan pays the sum assured directly to the lender. Whereas, in the case of a Term Plan, the sum assured is offered to the nominee/family so that they can repay the unpaid loans or use the amount for any other requirements.

Suppose you already have a sufficient Term Insurance cover that can take care of your other liabilities and family requirements. In that case, you can opt for a home loan insurance plan as it only covers your unpaid home loan dues by adjusting the sum assured with the outstanding home loan amount. However, a Term Insurance Plan offers the same sum assured throughout the policy term, and after repaying the dues, the family can use the remaining amount for other requirements. That said, the premium of the Term Life Insurance Policy will be higher compared to the Home Loan Protection Plan.

Warm Regards,
Ketki Jadhav
Content Writer