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Monday, July 1, 2013

Home Loan Insurance – Is it the Best option?

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Indians have unshakable belief in real estate as an asset class. However, with burgeoning prices in almost all parts of the country, buying real estate has become a costly affair these days.

 

Many people seeking to buy their first dream home are being forced either to postpone their decision or to buy with financed capital.

 

Although promising job prospects and salary hikes have empowered dual income families to opt for high value loans; most of such homebuyers are saddled with hefty EMIs.

 

Home loan EMI has significant bearing on one's financial plan. In case of any untoward event claiming life of the principal earner in the family; financial plan of the family may go completely out of whack.

 

On the other hand, it's also a risk to the financing company as their cash flows will be negatively impacted if the home loan borrower or his family is unable to repay the loan. Auctioning house would be an extreme option. To avoid this intimidating situation; home financers insist borrowers on buying home loan insurance cover.

 

What is home loan insurance Cover?

 

In simple words, it is an Insurance plan that covers only your outstanding loan liability (as per the original schedule in most cases). In case of death of the borrower; the proceeds of home loan insurance cover help the family repay outstanding loan.

 

Nowadays home loan insurance plans are available with some variations and provide borrowers with added unique features. Some Insurance plans provide critical illness cover at nominal added premium while others also cover home and its contents. Usually these are single premium plans.

 

Be aware of some commonly observed mal-practices

 

Banks and non-banking financial companies tie up with select insurance providers and bundle home loan products with home loan insurance plans. Banks might try to promote home loan insurance only of companies who they have 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;

 

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.

 

How should you cover your liability?

 

 

·         At first sight you might be convinced with buying single premium home loan insurance to cover your outstanding liability. However, there are certain disadvantages of doing so. For Instance,

·         Should you retire your entire loan at one go through the windfall gains you may have earned; you would end up paying excess premium to get covered for relatively short duration.

·         In case you want to transfer your home loan from your existing financer to a new financer; transferring your existing home loan insurance policy, though possible, may be irksome.

·         In most cases, amount of insurance cover comes down with the amount of outstanding liability. Since the insurance cover works as per the original payment schedule; the policy may leave you underinsured in case you opt for loan restructuring.

Happy Investing!!

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