Insurance to pay home loan EMIs

You are living in your home happily with your family. Life is good. But the life is not so simple and quite a happy journey. You may get a call from your office informing you that your entire division has been laid off as part of emergency cost-cutting measures. It could turn your world upside down at least till you get another job. You may have to default on all your commitments, including the most imp-ortant home loan EMI. What happens if you are not able to service your home loan and become a defaulter? Does your family have to move out of the home? This could be a scary situation for any of us.

Home loan insurance to protect your loan
This is where the home loan insurance, also known as the home loan protection plan (HLPP) comes into the picture. It ensures that you do not lose your home when you or your family is not able to pay the EMIs because of the death or any accident of the earning member of the family. In some cases, if you lose your job, you get a waiver of a few months on the EMIs.

Buyers are slowly waking up to the idea of home loan insurance. Banks too insist on it along with the home loan. This helps both ways; it ensures banks get their payment in case of death or disability of the borrower who may not be able to pay.

This is how it works. If you buy home loan insu-rance, you have to pay premium till the tenure of home loan. If something happens to you and you are no more able to pay the EMI, the insurance company pays the outstanding. If nothing happens, the home loan insurer will not pay anything to you.

Variants of home loan insurance
Home loan insurance is of two types. The first type is full home loan insurance where the insurance company pays the complete loan irrespective of the principal outstanding. If you have borrowed Rs 50 lakh and repaid around Rs 30 lakh by time you met with an accident, the insurance company will pay the borrower the entire amount that you have borrowed, i.e. Rs 50 lakh. This will allow the borrower to pay the home loan outstanding and also receive a sum that can help him survive.

The second type of ho-me loan insurance covers the principal outsta-nding only. If we use the example cited above, the insurance company will pay only the outstanding due of Rs 20 lakh and not the entire amount. Most insurance plans fall under this category. The premium can be paid in a lump sum or periodically.

Why Should you opt for loan insurance?
You may think that home loan insurance is an avoidable cost but consider these points before you decide to take or avoid the home loan insurance.

Coverage under home loan insurance scheme: The first thing to see in any insurance is the cover. Does it cover death only, or does it cover permanent disability, which renders a person without job, or job loss for any other reason? This depends on the specific features that insurance schemes offer.

Process of claim: Consider the process of claiming your insurance from the company. Many customers find it hard to go to the office of the insurer multiple times, fill up forms, wait for processing, and more. Does your family have to run from pillar to post to get the insurance amount? Unders-tand the process first and then opt for it. The process should be simple. A certificate of death or disability should be enough for the insurer to pay the loan amount to banks.

Relation between lender and insurer:
Many banks have tied up with insurer to offer insurance in conjunction with home loan. While you don’t have to opt for the same, this is a good option. Usually the processing becomes easier in these cases. How-ever, check the premium first.

Important points for borrowers
Many borrowers compare home loan protection premium with term insurance and find term insurance much cheaper than home loan insurance. This is true. Home loan insurance is expensive and adds to your already bloated home loan cost. This is where the features of home loan come into picture. Look at the features and clauses of home loan insurance. If it covers just death, you would save much by opting for term insurance. But if it covers disability, job loss for unforeseen circumstances, you can opt for home loan insurance.

In case of prepayment of loan or refinance, the existing home loan insurance becomes invalid. So your premium payments till now are useless. This may not hurt in case of prepayment but shifting to a new lender and opting for insurance will cost you extra money.

Finally, while banks may ask you to take home loan insurance along with home loan, this is not mandatory. You can take just the home loan if you do not want insurance. You can do your own due diligence on cover and premium with different insurance companies and decide the right company to take insurance from.

(The writer is the CEO of BankBazaar.com)