Avoid insurance Cover bundled with Home Loan
Nowadays, Housing finance companies and banks are mostly tied up with select insurance providers and bundled home loan products with home loan insurance plans. While taking home loan, on the act of surety, banks may push you to take home loan insurance plan for only those companies with whom they are tied up with.
Furthermore, they may not offer you an option to pay separately for your home loan insurance and include the sum paid towards premium in loan amount; which in effect will increase your EMI. There is a possibility that banks may try to push products which are unsuitable to cover such risks. For instance, banks may push endowment plans which may not provide you adequate cover and would prove to be cost ineffective. However, no law compels you to buy from the insurance company that has tie-up with your financer.
There are many problems with bundled cover for your home loan. These policies usually have a single premium option instead of the regular annual payment. The single premium option means that if a borrower decides to prepay the loan amount, it will not impact his insurance cover or the premium. Suppose, your bankerapproves you home loan of Rs 22 lakh and provides home loan cover with a premium of Rs 90,000 for a 20 year term and your loan will, then become Rs 22.90 lakh. And your EMI would be Rs22,480 pm by assuming rate of interest 10.25%p.a on reducing balance.
According to loan disbursed amount of Rs 22 lakh, the EMI should be Rs 21,596 /month for 20 years. In this way, your EMI has increased by Rs 884 per month for tenure of 20 years. It implies that you would have to pay extra of Rs 2,12,160 for whole tenure of loan in which the bank has not only disbursed Rs90,000 , but is also charging interest on the same.
On the other hand, if you decide to increase the tenure of the loan due to a hike in interest rates, your insurance cover may not be able to fully cover your loan. This is because though the insurance cover would reduce according to the original loan amortization schedule, the principal outstanding would reduce at a slower pace due to the extension of the tenure.
So, if the borrower dies during the loan term, his nominee will have to shell out the difference between the insurance payout and the actual outstanding amount. If the borrower survives the term, he will discover that he still has a few EMIs remaining even after his loan insurance cover ends.
There’s a small tax implication here. If the premium has been paid by the borrower himself, he is eligible for tax deduction under Section 80C and Section 10(10D). However, if it has been paid for by the lender and is part of the loan that he will repay through EMIs, it will not be possible to claim deduction.
Best alternative to Home Loan Insurance
A plain-vanilla term insurance is a better option which might provide you cost-effective insurance against all your liabilities including home loan. Being insured with adequate amount (through term Insurance) for the appropriate tenure doesn’t only help you manage your financial risk but may also give you better bargaining power against banks hard pushing their bundled loan products.
Financial planning would help you to arrive at the right amount of cover you may need to get yourself insured with while timely reviews would also keep your insurance portfolio trimmed and cost-effective.
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Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at firstname.lastname@example.org