Why you must insure your home loan

You always dream of owning a house. Most of us go ahead and even borrow the required funds to meet our dreams. But, have you ever thought of an unfortunate situation in which you would be unable to pay the outstanding loan amount.

You would certainly not want to put the burden of repaying the outstanding loan on your dependent family members. There's help at hand in the form of insurance cover on payment of a small premium.

For example, you avail a loan of Rs 15 lakh (Rs 1.5 million). In addition to the equated monthly instalments (EMIs), you can opt to pay an additional premium of Rs 500 to avail of an insurance cover. This cover ensures that the outstanding loan is repaid if the borrower dies during the term of the loan.

Banks like State Bank of India and Bank of India offer home loans which take care of uncertainties such as death of the primary borrower.

The life cover is equivalent to the outstanding loan amount as per the original repayment schedule of the loan. It protects the home loan borrower against death due to any reason except suicide in the first year of cover.

In the event of death, the insurance company pays the sum assured directly to the Bank. The borrower does not have to undertake any medical examination up to Rs 7.5 lakh (Rs 750,000) for borrowers in the age group of 18 to 60 years and Rs 3 lakh (Rs 300,000) in the age group of 61 to 65 years.

The State Bank of India has an arrangement with its insurance arm, SBI Life, to protect its home loan customers. Recently, Dewan Housing Finance Limited also tied up with SBI Life to offer a similar product. Bank of India followed suit by tying up with the leading private life insurance company, ICICI Prudential Life for the same.

The cover is basically group insurance negotiated by home loan providers for their borrowers. The mortgage term assurance provides insurance at up to 50 per cent lower rates than an individual policy. There is also a flexibility given to the customers.

One can either opt for payment of premium on a monthly basis or for a one-time payment. In the case of one-time payment, the amount is added to the home loan amount and equated monthly instalments are calculated on the total amount. In the case of monthly premium, the amount is added to the loan EMI.

The pricing of premium is determined by the borrower's age, the term of the loan and the quantum of loan. The minimum amount of premium is Rs 500.

Both individual and joint home loan customers are eligible for life insurance cover for a term between 5-20 years. In case of joint home loan customers, the younger borrower can get life insurance cover at 50 per cent of applicable premium. Borrowers in the age group of 18-60 years are eligible for this cover, and the maximum cover is capped at 71 years.

However, to drop a word of caution here.

It is a term insurance product. In simple words, a borrower will not get back the premium paid if he/she lives on beyond the loan repayment term. Home loan insurance cover is still a step worth taking for an individual.

The amount paid as premium over the term of the loan will aggregate to a meagre sum, but the protection it provides would be huge. If a borrower payers Rs 500 per month over 15 years for the insurance cover, the total premium paid will amount to just Rs 7,500.