Home loan customers are often persuaded by banks to purchase some kind of insurance policy (including ULIP) at the time of the loan approval. In fact, some branches hold it at the last stages of the loan approval process making it look mandatory to buy a policy or risk losing the home loan approval due to the tiny setback.
There have been instances where customers have been informed that an insurance policy purchase is compulsory to get a home loan.
Know the rules
The Reserve Bank of India (RBI) nor the IRDAI (Insurance Regulatory and Development Authority of India) has made it mandatory for customers to purchase home loan protection plans or any other insurance product with a loan product of any kind.
While home loan protection plans or property insurance is a good idea, you have the right to make your own price or preference comparisons before making a decision.
With regard to cross-selling of insurance products, IRDAI in its circular dated 2 February 2012 said, "Packaging two or more products could become unfair to the consumer when it impedes his or her choice or makes price comparisons difficult or impossible."
"One of the major concerns is bringing in transparency to prevent unfair commercial practices. At the same time, cross-selling facilitates service providers to use existing channels to reach out to those who are looking to buy insurance products. It is, however, necessary to ensure that the consumer is not put to any kind of disadvantage because of the packaging," it further said.
Generally, these "mandatory" insurance products are home loan insurance covers. It covers the liability of the customer's family members to pay off the loan in case of his/her death. The insurance policy will cover the debt if there were untimely death of the house owner were to occur.
Term insurance policies are ideal for these situations as term insurance is meant for high-risk situations and come with low-cost premiums for a high cover.
Banks insist on buying single premium term insurance and offer to add this amount to the loan. This way, the borrower will not have to pay anything upfront and get the loan insured. The equated monthly installments (EMIs) may increase a bit but may not look significant. For example, you will take a home loan worth Rs 30 to 50 lakh and the premium to cover this loan could come up to Rs 35,000-40,000 for the entire tenure.
However, some banks could insist on its customers on buying investment or life insurance products as well.
Is it helpful?
Term home loan insurance is not a bad idea. While you may have good life insurance in place, if it is not large enough to cover the home loan burden, your family could face financial strains in repaying it. It will also compromise with their future needs.
You can claim tax benefits under Section 80C and Section 24 of the Income Tax Act for paying home loan premium.
However, if you were to transfer the home loan to another bank in the future, the insurance plan will not be portable.
What should you do?
Suppose the annual premium towards the home loan insurance is Rs 3,000, the total liability towards the premium will be Rs 45,000 for a period of 15 years (assuming that is the loan tenure, for example). Single premium payments are ideally lower and could save you around Rs 10,000 overall.
1. At the time of home loan approval, ask your bank for the premium figure. Also, ask for the increase in the EMI burden that you would have to bear. Compare this premium liability with that of another insurance provider.
Further, you should consider whether you will be switching banks in the future and weigh that into making the final decision of where you purchase the home loan insurance from.
2. As for the bank pressurising on purchasing a policy from them or calling it mandatory, inform the lender that you are well aware that buying an insurance product with a home loan is not compulsory. You may also ask them to show a written document that states that such a purchase is mandatory. This may stop them for forcing you to buy one.
3. Measure your total liability against your life insurance. If you already have a very large life insurance cover, say Rs 1 crore, you may consider it to cover your family's home loan repayment burden rather than buying a home loan insurance cover.