A friend of mine, still single, took a home loan jointly with her father. She had one nagging worry though -- if something happened to her, what would happen to the home loan?
She did not want her father to bear the financial brunt of repaying the loan or having to sell the house to repay the bank.
Her brother faced a similar problem. Just married, he took a home loan and is worried that, should something happen to him, his wife would be saddled with the responsibility of paying off the debt.
If this thought has crossed your mind, maybe you should consider home loan insurance. That's right. We are not talking about home insurance but insurance for your loan.
What's insured?
The loan. Not the home.
What this insurance takes care of is the amount you will owe the home loan company or bank.
Also, what you have paid is not taken into account. Just what has to be paid.
Let's say you took a home loan of Rs 10 lakh (Rs 1 million).
Let's also assume that after you pay up Rs 2,00,000 of the principal amount, you meet with an accident. This means, a balance of Rs 8,00,000 still has to be paid to the home loan company. This is the amount the insurance company will cough up. They will not pick up the tab on the entire amount (Rs 10 lakh) but only on the balance amount owed (Rs 8 lakh).
An exception is ING Vysya Bank's home loan. In the event of something unfortunate happening to you, not only will the balance loan amount be paid off, your family will also receive the principal amount that has already been repaid on the loan (Rs 2 lakh in the above example).
This way, your family is not left without a roof over their head; neither do they have the hassle of paying up the Equated Monthly Installment (monthly payment to be made to the home loan company).
Of course, like any insurance policy, a premium will have to be paid. The insurance companies and home loan companies are not too forthcoming with how much this will cost, but say the premium will be decided on a case-to-case basis.
This premium will depend broadly on four conditions:
1. The age of the person taking the loan: The older you are, the higher the premium.
2. The loan amount: The larger the loan amount, the higher the premium.
3. The tenure of the loan: The longer the repayment period, the higher the premium.
4. The medical record of the individual: If you are in good health, the premium will be lower. For instance, if you have already had a heart attack or are in the high risk category, the premium will be higher.
What to look out for
Here are 10 questions to ask when looking at home loan insurance.
1. What is the insurance applicable for?
Is it for death by any cause or is it only for death by accident?
ICICI Bank, for instance, offers a free accidental death cover. This means your family will not face any problem concerning the loan repayment if you meet with an accident that results in your death.
Also check whether there is a permanent disability clause. If this clause is present, the insurance company will clear the loan even if death does not occur, but permanent disability does.
2. Do you have to run around for it?
The home loan companies would have teamed up with life insurance players to give you this benefit, so you do not have to scout for an insurance.
IDBI Bank has teamed up with Birla Sun Life Insurance Ltd and HSBC with Tata AIG Life Insurance Company. Union Bank of India has teamed up with SBI Life and Corporation Bank with Life Insurance Corporation of India.
You will not have to do any running around since the home loan player will do all the necessary arrangements and hand you the insurance forms. When (and if) the payment has to be made, the insurance company will make it directly to the bank or home loan player.
To claim the insurance, all you have to do is hand over the death certificate or medical certificate for disability to the home loan company.
3. Does it come as a freebie or do you have to pay for it?
Some players offer this free of cost.
ICICI Bank says it offers the accidental death cover totally free to the person taking the home loan. ING Vysya too offers an insurance cover at no cost to the person taking the home loan.
The rest of the players charge a premium.
4. Does the home loan have to be of a minimum amount?
The insurance is generally offered for the tenure of the loan and for the loan amount.
However, do check if they have any limits.
IDBI Bank, for instance, offers the insurance scheme up to a maximum of Rs 50 lakh (Rs 5 million) and for a maximum of 25 years, which is their loan and tenure limit.
5. Does the premium have to be paid at one go or can it be paid along with the EMI?
The insurance company insists the premium is a one-time payment. But the home loan company gives the customer an option.
Let's say you take a home loan and then get it insured.
You can pay the insurance company the entire amount upfront.
If you do not have the money, the home loan player will pay the premium on your behalf. Now, you have to pay the home loan player. They will add this premium to your total loan amount and it will become part of your EMI.
Let's say you took a home loan for Rs 10 lakh (Rs 1 million) and the insurance premium is Rs 1,00,000 (this is only an example and not an indication of premium rates).
The home loan company will pay the Rs 1,00,000 premium to the insurance company so your loan is insured. Now, your total home loan will be Rs 11 lakh (Rs 10 lakh + Rs 1 lakh premium).
Should something happen to you during the loan payment period and the balance outstanding is Rs 5 lakh, the insurance company will pay the home loan company the entire loan outstanding of Rs 5 lakh.
However, this option will be slightly more expensive for you. You will have to pay the home loan company interest on the premium since they have included it in your overall loan. Don't, however, fret if you have to pay your premium this way. After all, the amount spread over the tenure of the loan does not amount to much every month.
6. Is a health check-up necessary?
This varies from player to player.
IDBI home loan customers must either submit a health declaration form or undergo a medical examination.
If you take a home loan up to Rs 10 lakh (Rs 1 million) from Corporation Bank, a simple declaration of good heath is sufficient. Ditto if you are up to 45 years of age.
If you are above this age limit, or your home loan limit is higher, a medical examination at your cost is necessary.
7. Are there any exceptions?
Union Bank and Corporation Bank will not offer the insurance cover if death occurs within the 45 days of the start of the insurance cover, unless the death is due to an accident.
Generally, death by suicide too is never covered.
8. What happens if you pre-pay your loan?
What if you repay your loan way in advance, say a few years before its scheduled tenure? In that case, you would have paid the insurance premium for the entire tenure. Find out whether you lose the money or get it back.
Corporation Bank, for instance, which has teamed up with Life Insurance Corporation of India, says the appropriate amount shall be refunded by LIC.
9. What if it is a joint loan?
If it is a loan with a nominee, then no question arises since the main applicant will take the home loan insurance.
If it is a joint loan, two policies will have to be taken in the names of the joint applicants. A single application form would be used with the names of both the customers for policies and the premium amounts would get doubled.
HSBC offers the younger applicant a 10% discount on the premium.
In such cases, if one of the applicants dies, the loan is cleared by the insurance company.
10. What about the tax benefit?
Since you are paying a life insurance premium, you can get deduction under Section 80C. Read All about Section 80C to understand it better.
However, if it is clubbed with your EMI payments, you will not get the insurance benefit. The principal payments, however, will still get a deduction under Section 80C and the interest payments under Section 24.
Under Section 24, the maximum amount of interest that can be deducted from your income is Rs 1,50,000. As a result, your taxable income decreases by that amount.
Let me explain with an example.
Salary income: Rs 3,50,000
Interest payment on home loan: Rs 1,60,000
Taxable income = Rs 3,50,000 (income) - Rs 1,50,000 (maximum limit for interest on home loan) = Rs 2,00,000
Either way, you don't lose out. Whether you pay the premium at one go or along with your home loan, you still get the tax benefits.
If you already have a home loan but no insurance, ask your home loan company or bank if they will offer insurance for the remaining time frame.
If they do not, then approach any life insurance company and ask them if you can buy a policy on your home loan.
Note: The above examples are not a comprehensive list of players and the questions only have selective examples, not comprehensive listings.
