Why it makes sense to buy home loan insurance

But don't buy this product blindly! Here's what you must know before you sign on the dotted line

In 2010 Ganesh Shirke, a 37 year old bright employee of an advertising firm, worked very hard to put together a down payment for a two bedroom hall kitchen in Dombivili a far-fetched suburb of Mumbai. Since his prospects were good and he had risen two levels in two years in his firm, he was pretty sure that paying a hefty EMI of Rs 50,000 would not be a problem.

Barely had the family moved into their new home, that tragedy struck, and Ganesh met with an accident leaving him paralysed and his wife at a loss as to how to pay the EMI with two young children and her singing tuitions as an income.

Today the Shirkes deeply regret not having taken home loan insurance that was recommended by their lender. They had then dismissed it as a marketing gimmick of the bank, but they realise today that home loan insurance could have saved them from the trouble they are in today. Home loan insurance plans mitigate the risks associated with a long term financial burden of a home loan.

What is covered under home loan insurance?

Usually the whole amount is covered under such policies, but in some cases there might be a limit as to how much the insurer will cover. The death of the borrower or a permanent disability due to any illness or accident is covered under a home loan insurance.

Some companies even cover a job loss for a short period of time ranging between 1-3 months.

Although the home loan insurance is similar to a life insurance product, the sum insured usually reduces with the reducing outstanding loan. However some insurers offer a pre-determined flat sum irrespective of how much the outstanding loan balance is.

The other dissimilarity with life insurance products is that unlike term policies, home loan insurers do not pay the sum insured if the borrower is alive beyond the term of the policy.

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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Anyone who is eligible for a home loan, is considered eligible for a home loan insurance as well. Once you indicate that you are interested in opting for home loan insurance, the bank sanctions the loan amount along with the insurance amount after it's subjected to 90% (or 80% if the value of the property is more than Rs 20 lakhs).

In other words, your home loan eligibility is calculated after taking into consideration your insurance premium installment. Once the premium is calculated, it is split into small amounts and added to your EMI. But do bear in mind that since the bank is paying your premium amount in full to the insurer (while you pay a small amount over and above your EMI through the tenure of the loan) you are effectively paying an interest on the premium amount as well.

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The premium amount on your home loan varies according to the loan tenure, availed amount and age of the borrower. The higher the loan tenure the higher is the premium, and similarly the higher the age of the borrower, the higher is the premium amount as well. If the borrower is over 40 years of age, a health check becomes mandatory. If you are suffering from things like a heart condition or diabetes the premium you need to pay will be a little higher.

In case of the unfortunate incident that may strike, you must instruct your family members to file a claim by making a written application along with the relevant documents (death certificate, medical certificate etc) After having examined the documents the insurer will pay amount to the bank or the nominee you have stated in your insurance policy. Thus you can see, if you working so hard to take a home loan, it does indeed make sense for you to walk the extra mile to avail of a home loan insurance along with it.