Taking a Home Loan Protection Plan? Think Again!

A Home Loan Protection Plan is a single premium term insurance plan that covers the borrower’s outstanding home loan liability, if the borrower passes away, before the closure of the loan. Usually, banks sell home loan insurance plans along with the home loan.

A Home Loan is a huge liability and it is important to cover it. In case something happens to you, your family will have to hold the liability. Taking the appropriate cover can be a predicament too.

If you plan on covering your home loan with a home loan protection plan, you should reconsider it. Here are 5 reasons why a home loan protection plan is not a wise decision:

Home Loan Protection Plan is costlier than a Pure Term Insurance Plan:

The premium of a home loan protection plan is much more than a term life insurance policy. The following tables show the comparison between a term insurance plan and a home loan protection plan for a person who is 30 years old and has taken a protection plan of Rs 30 lakhs for a term of 20 years.

As seen in the above table, the premium cost of a term insurance policy is much lesser than a home loan protection plan.

Another disadvantage of a home loan protection plan is that it is depleting in nature.
For example: Mr. Gupta took a home loan protection plan of Rs. 50 Lakhs for 20 years. But, after 10 years Mr. Gupta passed away and he could not pay off his loan. A remainder of Rs. 20 lakhs has to still be paid off. The home loan protection plan paid off the home loan of Rs. 20 lakhs.

As you can see, in the above case, Mr. Gupta applied for a protection cover of Rs. 50 lakhs, but received only 20 lakhs. Unlike a home loan protection plan, a term insurance pays off the whole sum assured on maturity.

In a few cases, like HDFC ERGO home loan protection plan, a home loan protection plan is valid for only 5 years. This means if after every 5 years, you will have to renew your plan and pay premium again on your home loan insurance. This can make your loan even costlier.

Home Loan Protection Plan is a Single Premium Policy.

While applying for a Home loan protection plan, the borrower does not need to pay the premium at the point of time. The premium amount is added to the home loan principal instead. You should know that if you are paying interest on your home loan, you will have to pay an interest on the premium of the home loan protection plan too. This increases the cost of your home loan too. Unlike a home loan protection plan, in a term life insurance policy you can pay off your home loan on an annual basis. This way there isn’t much of a burden on me as you have to pay smaller amounts in regular periods.

Home Loan Protection Plan does not cover Natural Death.

Natural Death is defined as death caused due to natural causes, such as illness or ageing. While some plans might cover such natural causes and might include other such problems such as permanent disability and suicide, they come with higher premium rates. It is smarter to take a pure term insurance that covers all these factors at a lower price.

Home Loan Protection Plan becomes void if the loan is foreclosed.

If you decide to foreclose your loan from the start, it will be smart to not take a home loan protection plan. Foreclosing your loan will make your home loan protection plan invalid and you won’t get your premium refunded back. Part prepayment will cause reduce your principal amount and thus reducing the output of your home loan insurance.

If you Switch your Home Loan to another Bank, the Home Loan Insurance becomes void.

With the fall in interest rates, if you plan on switching your home loan, you should reconsider doing so, especially if you have a home loan protection plan. Your home loan cover becomes void as soon as you switch your loan; this is because switching your loan amounts to prepaying your loan in a bank by taking a loan from another bank. Your premium paid is not refunded back.

Home Loan is a huge liability and it is important to take the right cover for it. I would suggest you to take a pure term insurance simply because it is cheaper and is a better quality service, compared to a home loan protection plan. Banks and other finance institutions tie up with insurance companies and try to sell home loan insurance plans with along with home loans. As a home loan insurance plan is a third party product, the bank earns commission by selling it. Remember that no law compels you to buy any of these products. So you can avoid buying a home loan insurance plan as it is not compulsory.