Today, when you go for a home loan, most of the banks would insist that you have insurance. However, what they are insisting on is a home loan insurance and not a home insurance. Banks are interested in ensuring that you service your loan properly and on time. Hence home loan insurance comes in handy then. However, home insurance is more for the benefit of the borrower who owns the house property.
When you buy a house and take a home loan, your focus is on factors like cost of property, connectivity, ambience, cost of home loan, EMI size etc. However, there are two factors to also consider. What if your valuable assets in the house are stolen or destroyed? The answer here can be home insurance. But, what if the buyer of the property either dies or becomes incapacitated and is unable to service the loan. That is where you need to find out the best home loan insurance in the market.
What does Home Insurance cover?
Today, your property can be damaged or lost due to factors like floods, fire, acts of war, robbery etc. These are all factors beyond your control. While some are acts of God, others are not; but they still present key risks to your property. Home insurance is a type of insurance policy that protects you against the cost of repair and rehabilitation caused. This is also called property insurance and has two components.
- The Structure insurance or the Building insurance covers the cost of repair due to damage to the structure of the house in case of natural calamities or other acts of God like fire, floods, earthquakes, Tsunamis etc.
- Secondly, Content Insurance covers household effects and personal possessions against the risk of loss or damage. This can include furniture, home décor, electrical fixtures, electronic products, white goods, and other valuable items at home.
Home insurance is not mandatory for a home loan, but it is better for home owners to take it in their own interest.
What exactly is Home Loan Insurance about?
Before we understand, home loan insurance, let us understand the risks in a home loan commitment. Home loan is a long-term commitment of 20-25 years. It is hard to predict what will happen in these many years. For instance, the borrower could meet with an accident which makes them incapable of working and servicing the home loan. Worse still, if the breadwinner of the family dies, the family not only has to worry about family expenses but also retaining the home. That is where best home loan insurance comes in handy.
Look at a home loan insurance like a term insurance (pure risk cover), which will repay the balance of the home loan to the bank and allow the borrower to take clear possession of the home. The home loan policy comes in two different formats. There are home loan insurance policies, which just cover the EMI payments for a specific period, in exchange for a premium. The conditions under which the insurer will pay the EMIs are also set out in detail. The other is like a term policy, which will be extinguished upon death or incapacitation of the borrower and repay the home loan in full. Being a pure risk cover, the cost of insurance is generally quite low.
Let us finally turn to the types of home loan insurance covers available so you can choose the best home loan insurance cover. There are 3 types of home loan insurance plans that a home loan borrower can choose from.
- In a traditional level-cover plan, the insurance coverage remains unchanged through the entire tenure of the home loan. This is not a very efficient method since you end up having higher insurance than necessary and paying higher premiums.
- The second type of home loan insurance cover is a hybrid or interval cover plan. This is slightly different in the sense that the coverage remains static for a period of about 5 years and then starts reducing in tandem as outstanding loan balance also reduces.
- Reducing cover plan is a more refined and economical form of interval life insurance cover wherein the coverage and remaining loan reduce in tandem along with tenure right from the beginning.
Remember, a home loan insurance is a plain vanilla risk cover, so you can structure it yourself. For instance, if you have a Rs1 crore loan over 20 years, take 4 term covers of Rs25 lakhs for tenures of 5 years, 10 years, 15 years, and 20 years respectively. Your effective cost is much lower and your outstanding loan is covered through the tenure of the home loan. By understanding these nuances, you can select the best home loan insurance cover.