When Delhi-based Sabyasachi Patnaik took a home loan from Bank of India, he was relieved to find that it came with a mortgage insurance plan from ICICI Prudential Life Insurance. As a business management consultant, Patnaik knows all about risk and the benefits of hedging risk.
The mortgage cover, he knows, will ensure that his financial dependents will not be saddled with a large loan in case he dies. The concept of mortgage cover has been gaining popularity over the past few years, thanks to the booming home loan market.
| FIVE THINGS YOUR LENDER AND INSURER WON'T TELL YOU |
| By bundling the premium with your loan, the lender is insuring himself first |
| Don't opt for a single premium plan, particularly if you are likely to repay the loan before the tenure |
| Women taking home loans and structured mortgage cover are generally eligible for a better premium |
| If home loan rates go up and you opt to extend the loan period, instead of paying higher EMIs, the insurance cover does not get extended |
| You are eligible for S ection 80C deduction when you take a mortgage cover |
“It may be easy for one to avail of a loan, but the house does not belong to you until the loan is repaid,” warns Pranav Mishra, senior vice-president, ICICI Prudential. Borrowers are beginning to understand that life insurance alone will not be able to take care of the loan repayment in case of any unforeseen event. Mishra adds: “People now understand the risk associated with their lives quite well and with this [mortgage insurance] plan they can ensure that their families are sheltered.”
Apart from ICICI Prudential, players like MetLife, SBI Life, Allianz Bajaj Life, Reliance Life and HDFC Standard Life all offer mortgage cover. What exactly is mortgage cover? And how different is it from pure life cover, which can also be used to cover your loan obligation in case of your death or, in some cases, permanent disability? Mortgage insurance mirrors the loan amortisation schedule, which means at any given instance the loan outstanding is equal to the sum assured on the policy and vice-versa.
“The objective of such plans is to introduce customised risk protection at an affordable price,” says Rajesh Dalmia, a Kolkata-based financial planner. The policy is issued only after the loan is sanctioned and is in your name with the beneficiary being your spouse or any close relative.
In the event of your death before the loan is fully repaid, the sum assured is paid to the beneficiary, who will not have to liquidate any asset in order to repay the loan. But what about fluctuating interest rate and its impact on the loan term? With upward interest swings, the loan term goes up, but the policy remains the same.
This is an area that the policy does not address, as it assumes the borrower will pay a higher EMI and not increase the tenure. Says US Roy, managing director, SBI Life Insurance: “Niche products are developed with a level of customisation and complexity that factors in all possibilities, enabling various payment options to both the lender and the borrower to match their needs.”
 Sabyasachi Patnaik, 33 years |
| Home loan from Bank Of India insured by ICICI Life Insurance |
| "Since I took a big-ticket loan, I had to make sure that nobody would have to face any unpleasant situation if anything happened to me while the loan was being repaid. I opted for a single premium plan as the lender offered to add that to my loan amount." |
What if you plan to prepay your loan? In case of such foreclosure, the insurance company usually offers a pro rata refund of the premium after deducting some nominal policy charges. Explains Dalmia: “The policyholder is protected by the exit clause even when the policy may be to protect the lender more than the individual.” Remember you have to pay premium for only two-thirds of the loan tenure.
So, for a loan of 15 years, the policy premium payment is for 10 years. This means that you have a cover for 15 years but your premium payment ends in 10 years. If you were to foreclose your loan and this policy, it has to be before 10 years. Which brings us to the most important question regarding mortgage insurance: who is it actually meant for? Lenders often include the price of the mortgage cover premium in the loan amount, making you believe that their sole intention is to protect you.
The truth is that they are protecting their own interests, as they know the loan will then get repaid without any problem. Further, interest is calculated on the entire amount (the loan plus the cost of the insurance). This makes the structured mortgage protection plan an expensive proposition.
| IF YOU BUY PROTECTION WITH LOAN | |||
| Insurer | Annual premium (Rs) | Total premium over the tenure (Rs) | Single premium (Rs) |
| Allianz Bajaj Life | 6,150 | 61,500 | 23,715 |
| HDFC Standard Life | 6,510 | 65,100 | 33,270 |
| ICICI Prudential Life | NA | NA | 24,510 |
| MetLife | 3,567 | 35,670 | 22,131 |
| Reliance Life | 4,745 | 47,450 | 36,130 |
| SBI Life (Credit Guardian Plan) | NA | NA | 24,195 |
| All premiums as payable by a 30-year-old healthy male to cover a Rs 15-lakh home loan for 15 years and premium tenure of 10 years. | |||
If you have sufficient knowledge and are prepared to do a little extra work, you might find that creating your own mortgage cover works out cheaper than taking a structured policy. The tables (“If You Buy...”) show how you can take two pure term plans for two different tenures, ensuring that the cover is very similar to that offered by a structured mortgage insurance policy, which mirrors the loan amortisation schedule.
Your premium works out to be lower. In addition, you have the flexibility to prepay your loan without having to pay the interest on the premium component as well. However, if you don’t know enough and are unable to make the right calculations regarding the tenure and amount of cover to take, it’s a good idea to pay that little extra and take a structured mortgage cover.
| IF YOU BUY PROTECTION SEPARATELY | ||
| Sum insured (Rs lakh) | 10 | 5 |
| Policy tenure (years) | 10 | 15 |
| Annual premium (Rs) | 2,564 | 1,406 |
| Total premium (Rs) | 25,640 | 21,090 |
| Table shows if you take two policies of LIC's Anmol Jeevan 1 (not necessarily the cheapest pure term plan) with combined cover of Rs 15 lakh and with tenures of 10 and 15 years each, your annual premium will be Rs 3,970, for the first 10 years and Rs 1,406 for the remaining five years — lower than premium for structured plans mentioned in the top table. | ||
Find out if your lender offers an annual premium option or if you have to take a single-premium plan. The premiums on the single-payment option are lower than on annual payout options. This is because on annual premium option the insurer has to factor in the probability of a lapse or delay in premium payment and the administrative cost of handling premiums every year.
Remember that a home loan is for a long tenure and that anything can happen during that time. It’s good to play safe and ensure that your family is not left stranded with a huge loan and no way to repay it. When it comes to life and insurance, the old cliche about prevention being better than cure is very, very true.
