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Home Loan Insurance

Home Loan Insurance Plans

Last Updated 15th Apr 2021

  • Home loan insurance is a loan protection plan that ensures the repayment of the loan to the lender, in case of repayment failure by the borrower.
  • It is beneficial for both lenders and borrowers.
  • The premium is distributed along with the principal amount, thus flexible payments.
  • The home loan protection plan covers all borrowers in case of joint home loans.
  • The insurance plan provides tax benefits under Section 80 (C) and Section 80 (D) of the income tax Act.
  • Home loan insurance is not the same as home insurance.
  • As per IRDAI, the sum assured and policy tenure will be increased for home loan borrowers who have availed moratorium option.
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What is Home Loan Insurance?

A home loan insurance is a protection scheme for home loan buyers that provides home loan coverage in case of unfortunate and unavoidable circumstances that may happen with the home loan borrower. In case of home loan insurances, if the borrower fails to repay the entire loan amount, the insurer clears up the outstanding balance of the borrowed home loan with the lender. These insurance plans help loan borrowers deal with the unpredictability associated with human lives. With home loan protection insurance, the borrower is assured that in case of unforeseen situations, the burden of home loan won't fall on his family members.

Why is Housing Loan Insurance Important?

A home loan insurance covers the loan amount in case of failures of repayment. Thus it is beneficial for both the lender and the borrower.

Importance of Home Loan Insurance for Lenders- Home loan insurance policy is important for lenders. Banks and NBFCs earn a lot through home loan interest rates. Failure by borrowers hampers the lender's regular sources of income. Thus, home loan insurance is ideal for lenders, because in any case, banks receive the expected funds.

Importance of Home Loan Insurance for Borrowers- Home Loan insurance is important for borrowers because it ensures that in case of failure of repayment of the loan, the insurer will pay back the loan on his or her behalf. In that case, the home loan won't create a burden in times of financial crisis over the borrowers or their family members. Also, since the home loan is a secured loan, the non-fulfillment of loan responsibilities gives the lender the right to acquire the borrower's house. However, with home loan insurance, the house remains entitled to the borrower even if he or she fails to repay.

Types of Home Loan Insurance Policy

The home loan insurance is divided into three types- the Level Cover Plan, Hybrid cover plan, and reducing cover plan. These three types vary on the basis of insurance coverages, as mentioned below:

The Level Cover plan: In a hybrid cover plan, there is full coverage in the initial year. However, with time as the balance amount reduces, the coverage reduces too.

The Hybrid Cover plan: In this type of home loan protection plan, the coverage remains the same throughout the loan tenure.

The Reducing Cover plan: In the reducing cover plan, the coverage never remains the same. Indeed, it reduces as the balance amount reduces.

Features of Home Loan Insurance

It is advisable to know the features of home loan insurance plans before opting for one. These are listed below:

Payments: There is only a one-time premium amount to be paid and not multiple premium requirements on insurance against home loans. However, payments of home loan insurance premiums are paid in accordance with the EMIs. Thus, the premium amount is distributed in monthly payments, just like the principal loan amount.

Implications on Balance Transfers: In the case of home loan balance transfers, the implications of home loan insurances might change. At times the new lender might insist on having a different home loan protection plan or might be comfortable with the previous one. Also, the home loan insurance might lapse with the balance transfer, and the insurer might ask you to start over insurance plans again. Thereby, in case of balance transfers, one should ensure restructuring the home loan insurance plans.

Covers Joint Home Loan Borrowers: Home loan insurance is not restricted to any particular individual in case of joint home loans. Indeed, in the case of joint loans, the insurance coverage applies to all co-applicants.

Benefits of Home Loan Protection Plans

There are multiple benefits associated with home loan protection plans. These include:

Security cover: The key benefit associated with a home loan insurance plan is that it provides security coverages to both the lender and the borrower. While the lender is saved from incurring losses, the borrower is saved from a big liability in times of financial shortcomings.

Tax benefits: The premium that is paid on home loan insurance provides tax benefits to borrowers similar to that of a home loan. Premiums paid are eligible for tax deductions under section 80 (C) and 80 (D) of the income tax act.

Convenience and flexibility: Home loan insurance premiums are usually charged at high prices. However, to make it easy for the home loan borrowers, lenders, most of the time, club the premium amount with the regular EMIs. Thus, similar to the principal amount borrowed, the premium is also paid in installments, which makes it convenient for the home loan borrowers.

Inclusive to Add-ons: Housing loan insurance policies are very inclusive in nature when it comes to enhancing the cover benefits. For instance, home loan insurance provides coverage towards various plans that include illness, sudden deaths, or unemployment. However, suicides are not covered under the home loan insurance plan. Additional benefits can be availed by opting for term insurance for home loans.

Difference Between Home Loan Insurance and Home Insurance

A home loan insurance is different from a home insurance. The following table lists out the differences between the two.

Home Loan Insurance Home Insurance

A home loan insurance can be bought only when an individual has an ongoing home loan or is applying for a new housing loan.

Regular home insurance can be bought anytime as long as one owns a house.

Home loan insurance lasts until the end of the loan tenure.

Home insurance ends when the opted tenure ends. It can be opted for up to 30 years.

A home loan insurance helps the borrower repay his or her loan amount in case of his or her inability to do so.

Home insurance provides coverage to the insured's house if any damage occurs like that of thefts, fire, floods, burglary, etc.

Examples of home loan insurance: HDFC Life Home Loan Protection Plan, SBI Life Saral Shield, etc.

Examples of Home insurance: HDFC Ergo, Bajaj Allianz, SBI Long Term Home Insurance Policy, etc.

FAQs

Is it mandatory to buy insurance for a home loan?

It is not mandatory to buy insurance for home loans. However, some lenders insist borrowers buy one, to ensure repayment of home loan.

How does home loan insurance work?

Home loan insurance works as a protection plan for your home loan. There is a one-time premium charged in home loan insurance, that is distributed as per EMIs. In case of failure of repayment, the insurer pays the loan amount on behalf of the insured.

What is the benefit of home loan insurance?

Home loan insurance is beneficial for both the lender and the borrower. While a borrower, along with his family, is saved from the liability of a home loan, the lender receives the loan payments on-time.

What is the Home Loan Protection Plan?

Home loan protection plan is an insurance scheme, under which the insurer commits towards the loan responsibilities when the borrower fails to meet them due to any unforeseen reason.

Is property insurance mandatory for home loans as per RBI?

There are no compulsions from RBI for borrowers to go for home loan insurance. A lender may advise, but the choice to opt for the loan insurance rests with the borrower.

Example of home loan insurance?

There are many home loan insurance plans provided by insurers. Some of the best home loan protection plans include SBI Life- Rinn Raksha, SBI Life Smart Shield, SBI Life Saral Shield, and HDFC Life Home Loan Protection Plan, among others.

Is home loan insurance and home insurance the same?

Home loan insurance is not the same as home insurance. While a home loan insurance provides coverage against the payment of the loan, home insurance, on the other hand, provides insurance coverage against the damage that occurs with the insureds house.

Is Home Loan protection insurance tax deductible?

There are some tax implications on home loan protection plans. A borrower can claim tax deductions on the premiums up to Rs 1.5 lakhs under Section 80 (C) of the income tax act.


Home Loan News - Apr 2021
  • 2021-04-13 : Bank credit rise 5.56%; deposits 11.4% in FY21
    RBI reported that the Bank credit which includes retail loans like home, personal, business, car, two-wheeler, education and doctor loan along with business and mudra loans grew 5.56% to Rs 109.51 lakh crore in the financial year ending March 31, 2021. Further, the deposits include fixed and recurring deposits and rose 11.4% to Rs 151.13 lakh crore.
  • 2021-04-13 : Housing finance companies likely to witness a growth of 8-10% in FY22
    ICRA reported that with the increase in housing loan demand in the last quarter the HFCs are likely to witness a growth rate of 6%-8% during the year and 8%-10% in FY2021-22.
  • 2021-04-13 : Kotak Mahindra Bank kept its home loan rate unchanged at 6.65%
    Even as some of the banks have hiked their home loan interest rate, Kotak Mahindra Bank has kept the home loan rate unchanged at 6.65%. The interest rate is applicable for both the home loan and balance transfer product. The bank is aiming to increase its share in the housing loan market.
  • 2021-04-13 : Bandhan Bank’s collection efficiency ratio at 96% in Q4
    Bandhan Bank reported an overall collection efficiency of 96% for the quarter ending March 2021. Total advances which include retail loans like home, personal, business, car, two-wheeler education and doctor loan along with business and mudra loans grew by 21% at ₹87,054 crores. Deposits which includes fixed and recurring deposits grew by 37% at ₹77,972 crores. Further, CASA deposits increased by 61 per cent at ₹33,827 crores.
  • 2021-04-07 : IIFL Home Finance signs co-lending agreement with Standard Chartered Bank
    IIFL Home Finance and Standard Chartered Bank have entered into a co-lending arrangement for extending credit. Under this agreement, IIFL Home Finance and the Standard Chartered Bank will co-originate these loans and the IIFL Home Finance will service the customers through the entire loan life-cycle including sourcing, documentation, collection and loan servicing.
*Terms and conditions apply. Credit at sole discretion of lender subject to credit appraisal, eligibility check, rates, charges and terms. Information displayed is indicative and from collected from public sources. Read More
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