What is a home loan insurance plan?
Home loan insurance even known as mortgage insurance has become extremely important and well-liked in the present-day economy due to the ever-increasing prices of properties in India. Life is unpredictable, and so is our financial status. It is an excellent choice to secure your future as well as to provide financial stability to your loved ones with the help of home loan insurance. To know how it benefits us, we must know what home loan insurance is.
According to a home loan insurance plan, the insurer needs to settle the outstanding Home Loan amount taken from the lender or the bank in case of an unfortunate event. Some of the all-inclusive kinds of home loan insurance plans provide insurance cover for the applicant, the house, and all the contents of the house. The premium to be paid for home loan insurance is eligible for tax benefits.
Types of Home Loan Insurance
Lenders provide three types of house loan insurance: Level Plan, Hybrid Plan, and Reducing Cover Plan, which is described further below:
- Level Coverage Plan: The insured's coverage remains the same throughout the loan term.
- Hybrid Coverage Plan: During the first year, the coverage is complete. It begins to decrease as the balance amount decreases over time.
- Reducing Cover Plan: With the passage of time, both the coverage and the outstanding loan are reduced.
It is self-evident that if a borrower has not yet paid for term insurance, he or she can get home loan insurance. Term insurance and house loan insurance cannot be compared in terms of features, but their purposes and benefits are identical. Borrowers with a house loan should consider purchasing home loan insurance to protect their families in the event of a disaster. Taking out house loan insurance, on the other hand, is not required. However, most consumers will think about it before taking out a home loan from any lender.
Difference between Home Loan Insurance and Home Insurance
Generally, people get confused between home insurance and home loan insurance. There are two terms that are completely different and serve for different purposes.
With home contents insurance, it covers your home against the following risks:
- Property and property damage from theft.
- Damage caused by natural disasters such as earthquakes, storms, floods, fires, etc.
This means that contents insurance covers the costs of replacing your home in the event of damage. While the mortgage loan insurance will cover the loan you get to buy the property. This plan only covers the outstanding liability of the loan as of the date it was drawn.
Most lenders have mandatory home insurance. Considering that mortgage loan insurance is not mandatory and is at the sole discretion of the loan applicant or borrower.
State the importance of home loan insurance for borrowers?
Lenders would never want their loans to turn into bad debts. They would like to protect their money by taking home loan insurance. In case of the borrower’s demise, the lender will lose all the money which is given as a loan to the borrower, if the borrower was the only breadwinner of the family.
We are now aware that, home loan insurance plan covers the due amount of the home loan in an event where the borrower is unable to pay his/her debts. The situation can arise due to the instability of the borrower’s job or his/her demise. You have an option to go for a regular plan or to opt for an insurance plan that offers additional features along with more enhanced coverage. Home loan insurance is essential for the loan borrowers as it gives the sense of security that the dependents will not become homeless or financially drained in case something happens to the borrower, unfortunately.
Points to be considered before opting for home loan insurance:
- Term insurance – It is taken so that all your debts are taken care of and not just the outstanding home loan.
- Separate home insurance – In this insurance scheme, only your outstanding home loan is taken care of if you cannot pay it off.
Home loan insurance schemes generally come with reducing coverage with them. The amount of coverage is set based on the outstanding home loan. Therefore, the total amount of insurance reduces when the borrower repays the loan amount. On the other hand, in term insurance, coverage remains the same. The sum assured is taken by the nominee who can settle the payments to the lender for the outstanding loan.
Home loan insurance can either be purchased from any general insurance company or from a life insurance company. The policy offered by the general insurance companies needs to be renewed yearly whereas life insurance companies offer plans for longer terms.
It is essential to know about the riders and add-on covers before finalizing any home loan insurance policy. It is useful to go for a plan that offers coverage for events like unemployment or disability, along with demise. Also, you must check whether the policy covers just natural death or accidental demise too.
You should also keep an eye on the loan tenure and coverage period of insurance. It is advisable to go for more extended duration plans and for a shorter one with a mindset that you will extend it later. As you may forget it later, and also it becomes difficult to get good coverage as you grow old. Even if you get it, it will be very expensive.
Be very sure, that your insurance scheme is up to mark with all your requirements. Compare various policies that are available in the market to opt for the best one. Be sorted with your expenses as the premium payments along with loan EMI, needs to be paid on time.
How is the cost calculation done for home loan insurance?
A home loan insurance cost calculator is to determine how much coverage you should go for when you are looking to insure your home. This helps in finding out the right plan and the amount of coverage you need to protect the house and its contents from perils like hail, fire, and other man-made damages. The amount of coverage is calculated based on the area, the approximate cost of the contents, the value of the building, and other such related factors. When you talk about the assets that you own, home tops your list. Not because of the price as it is the costliest asset but because of the emotions attached to this shelter that protect your family. To guard your most valuable asset, you should go for a comprehensive home insurance policy especially the one that covers your house and all its contents.
What are the features of the home loan protection plans?
- Payment of premium – The majority of the home loan protection plans are single premium policies which means you need to pay for the premium only once. Lenders often add the amount of premium to the loan amount as it is pretty high. The borrower pays the loan premium along with the loan EMI’s. For instance, if you are borrowing a loan of Rs.30 lakh and the home loan protection scheme that you opt for costs Rs.1.5 lakh, then you need to pay your EMIs on Rs.31.5 lakh.
- Life covers – Most home loan insurance plans, provide life coverage corresponding to home loan outstanding amount. Once the loan amount is settled, the live coverage also ends.
- Riders or Add-ons – Many insurance schemes also provide optional rider plans to augment their coverage benefits. The add-ons that are available include terminal illness, no job for up to 3 to 6 months, accidental demise and disability. The cost of the policy along with these add-on features is more expensive as compared to regular home loan insurance plans.
Define parameters of home loan insurance plan?
The insurance coverage cost is determined based on the following parameters.
The coverage will depend on the type of plan that you opt whether you are ensuring only the building or the belongings as well. If you go for only building plan, the price of the home structure will be taken into account. For belongings, the cost of personal things and jewelry will be taken into account. For a comprehensive plan that covers both contents and building, the cost of both adds up.
Value of the Building
The value of the building is calculated based on its reconstruction cost and not the current market value of the property. The insurance coverage should sufficiently recompense for the reconstruction cost. To analyze the building value, the built-up area of the building and the construction rate per square feet is multiplied. For instance, if the built-up area of the home is 1200 sq.ft and the total cost of construction is Rs.1, 500 per sq.ft, the sum insured will be Rs.18, 00,000.
Value of belongings and Jewelry
You must specify the value of contents and jewelry to analyze home insurance coverage costs accurately.
When it’s about a home loan, read here how to increase your home loan eligibility?
In this blog, you can check the difference between home loan insurance and home insurance that helps you to understand the difference. You can also check the types of Home Loan Insurance offered to individuals. For more details visit Afinoz.com and get more help in a simple way.