Taking a home loan? Here's how home loan insurance works and what to check before buying

I’m Rajveer, a 33-year-old IT professional. I have recently bought a 3BHK home in Gurgaon with a home loan of 1cr with a repayment tenure of 15 years. The bank is suggesting a home loan insurance policy to cover the outstanding loan in case something happens to me, but I’ve also found cheaper alternatives online. How does home loan insurance actually work, and should I buy it from the bank or a third-party insurer? Does the coverage reduce as the loan principal decreases over time? What key factors should I evaluate before buying such a policy?

Advice by Varun Agarwal, Business Head of Term Insurance at Policybazaar

Thank you for asking a question that many homebuyers grapple with while taking one of the biggest financial decisions of their lives. 

First of all, home loan insurance is a type of term insurance that pays off the outstanding loan liability in the unfortunate event of the death of the borrower, with some insurers offering protection in instances of disability and critical illness as well. In home loan insurance, the policy term equals the outstanding tenure of the loan, and the sum assured reduces in line with the outstanding loan liability.

This means that as you continue to repay your home loan over the years, the insurance cover also gradually reduces, mirroring the outstanding balance. The objective is to ensure that your family is not burdened with repaying the remaining loan if an unforeseen event occurs during the policy term.

As per RBI directives, it is not mandatory to bundle home loan insurance along with the loan. Customers can purchase home loan insurance from other sources as well and assign the policy to the bank, if needed. Banks cannot refuse such an assignment. Therefore, before making a decision, it is advisable to compare the features and pricing of policies offered by the lending institution with those available from other insurers. A little research at this stage can help you find a policy that best suits your needs and budget.

There are several factors that one must evaluate before purchasing home loan insurance:

• Claim Settlement Ratio: Top insurance companies offer a CSR of 99%+, thus assuring customers of payouts for genuine claims.

• Price: Insurance companies now offer retail home loan insurance products with 0% GST, which can be up to 70% cheaper than bundled group insurance products.

• Flexibility in Policy Terms: Insurance companies should offer flexibility in choosing the payment frequency and premium payment term. It is also useful to understand the available premium payment options and choose one that aligns with your financial planning.

Taking the time to compare policies instead of opting for the first offer can make a meaningful difference in terms of cost and benefits over the long term. I hope this answers your questions and helps you make a more informed decision while choosing protection for your home loan.

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