Home loan insurance works by covering the outstanding loan amount in case of the borrower’s death, disability, or critical illness, depending on the policy term
A home loan is a long-term commitment of 15 years or more. Until the loan is paid off, the equated monthly installments (EMI) must be paid regularly. However, in the unfortunate event of the demise of the main breadwinner, servicing a home loan may become a burden.
One may take home loan insurance to protect oneself against such an eventuality. However, home loan insurance is not mandatory in India. While it is not legally required, opting for home loan insurance offers an additional layer of financial security, protecting both the homeowner and their dependents.
“In the unfortunate event of the homeowner’s demise, if the dependents are unable to continue EMI payments, the lender may repossess and auction the property to recover the loan amount,” says Kanwar Bhatia, executive director, Urban Money, a tech-enabled loan platform.
This could leave the family without a home. Home loan insurance prevents such situations by covering the outstanding loan, ensuring the dependents are not burdened or displaced.
How Home Loan Insurance Works
Home loan insurance works by covering the outstanding loan amount in case of the borrower’s death, disability, or critical illness, depending on the policy terms. The family is thus relieved from the burden of paying EMIs.
“A one-time premium is often paid, and the policy tenure aligns with the loan duration. It is highly recommended for borrowers, as it offers peace of mind and protects dependents from financial distress,” says Bhatia. The premium can also be added to the loan amount and paid in equated monthly installments.
Decreasing Term Insurance
Home loan insurance is typically a form of decreasing term insurance. “The coverage reduces over time in proportion to the outstanding loan amount, ensuring that the insurance cost aligns with the liability. This makes it a cost-effective solution, tailored to the borrower’s loan repayment schedule while providing necessary financial protection,” says Bhatia. The premiums paid towards home loan insurance can be claimed as deductions under section 80C.
It is important to compare different policies before you choose one. While looking for adequate coverage is important, you also need to be clear about critical illness or disability coverage as that might also be a reason for not being able to pay EMIs.