Nowadays, Housing finance
companies and banks are mostly tied up with select insurance providers and
bundled home loan products with home loan insurance plans. While taking home
loan, on the act of surety, banks may push you to take home loan insurance plan
for only those companies with whom they are tied up with.
Furthermore, they may not offer
you an option to pay separately for your home loan insurance and include the
sum paid towards premium in loan amount; which in effect will increase your
EMI. There is a possibility that banks may try to push products which are
unsuitable to cover such risks. For instance, banks may push endowment plans
which may not provide you adequate cover and would prove to be cost
ineffective. However, no law compels you to buy from the insurance company that
has tie-up with your financer.
Cost
of bundled cover with your home loan
There
are many problems with bundled cover for your home loan. These policies usually
have a single premium option instead of the regular annual payment. The single premium option means that if a borrower decides to prepay the loan amount, it
will not impact his insurance cover or the premium. Suppose, your banker
approves you home loan of Rs 22 lakh and provides home loan cover with a
premium of Rs 90,000 for a 20 year term and your loan will, then become Rs
22.90 lakh. And your EMI would be Rs22,480 pm by assuming rate of interest
10.25%p.a on reducing balance.
According to
loan disbursed amount of Rs 22 lakh, the EMI should be Rs 21,596 /month for 20
years. In this way, your EMI has increased by Rs 884 per month for tenure of 20
years. It implies that you would have to pay extra of Rs 2,12,160 for whole
tenure of loan in which the bank has not only disbursed Rs90,000 , but is also
charging interest on the same.
On the other hand, if you decide to
increase the tenure of the loan due to a hike in interest rates, your insurance
cover may not be able to fully cover your loan. This is because though the
insurance cover would reduce according to the original loan amortization
schedule, the principal outstanding would reduce at a slower pace due to the
extension of the tenure.
So, if the borrower dies during the
loan term, his nominee will have to shell out the difference between the
insurance payout and the actual outstanding amount. If the borrower survives
the term, he will discover that he still has a few EMIs remaining even after
his loan insurance cover ends.
Tax implications
There's a small tax implication here.
If the premium has been paid by the borrower himself, he is eligible for tax
deduction under Section 80C and Section 10(10D). However, if it has been paid
for by the lender and is part of the loan that he will repay through EMIs, it
will not be possible to claim deduction.
Best alternative to Home Loan Insurance
A plain-vanilla term insurance is a
better option which
might provide you cost-effective insurance against all your liabilities
including home loan. Being insured with adequate amount (through term Insurance)
for the appropriate tenure doesn't only help you manage your financial risk but
may also give you better bargaining power against banks hard pushing their
bundled loan products.
Financial
planning would help you to arrive at the right amount of cover you may need to
get yourself insured with while timely reviews would also keep your insurance
portfolio trimmed and cost-effective.
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