Do NOT Opt for Home Loan Protection Insurance Plans

First I thought the title of this article should be “Home Loan Insurance – Daylight robbery” – so you can imagine what I am trying to say.

Most of us wish to have a home in our own name. From a financial perspective, it is a big step and a huge investment which all of us cannot make on our own. We, therefore approach banks for loans. Banks are in the business to make money and will try to up sell or cross sell products. Some banks offer a home loan insurance protection plan when you apply for a home loan. Some banks claim it is compulsory to buy insurance along with the home loan. Some banks claim they cannot issue the loan if the customer does not buy insurance.  Sometimes customers are desperate and sometimes ignorant and they end up buying unnecessary products.

Home Loan Protection Insurance Plans

Image courtesy of jesadaphorn at FreeDigitalPhotos.net

But here are some reasons as to why the offer of home loan insurance may not be in the best interests of the customer –

Home Loan Insurance is VERY Costly  –

The home loan insurance plan is sold along with the home loan with the reasoning that in case of an unfortunate event of accident or death of the borrower, the remaining loan will be paid off with the sum assured and the dependents can be covered from financial worries. But a term insurance plan serves the same purpose. You buy a term insurance plan and your dependents get the sum assured in case of an unfortunate event and the sum assured can be used to pay off loans as required.

Read5 insurance policies that you may not need

Let us compare the cover provided by  ICICI Loan Protect Plus with a  7 year fixed moratorium and ICICI Term Insurance for a 35 year old male with a sum assured of Rs. 50,00,000

ParametersICICI Pru Loan Protect PlusICICI Pru iProtect Smart
PremiumRs. 50,157 (excluding service tax and cess) p.a. for 5 yearsRs. 7,100 per annum.

 

Premium ComparisonFor 5 years, you pay at least Rs. 2,50,875.

You cannot stop paying it as if you do not take the one-pay option, the premium will get included in the EMI.

If you consider the sum of Rs. 2,50,875, you can pay premium for term cover for  35 years. Usually a person will not take a term plan for so long and has the flexibility to stop premium payment whenever appropriate.
Features and BenefitsIf accidental death benefit is taken for a policy of Rs. 50,00,000, till the 7th year, Rs. 50,0000 for life cover and Rs. 50,00,00 for accident benefit will be given.

Premium can be paid either once or yearly.

 

Covers death, accidental death and permanent disability

Covers female organ cancers

Benefit amount is payable as a lump sum or as monthly income for 10 years

There are different premium payment options.

There is option to surrender the policy subject to some terms and conditions.

It covers the insured irrespective of the loans taken. You can easily port your existing loan to another lender without the insurance being affected.

 

Death Benefit PayableIn case of natural death in the first 7 years, it is Rs. 50,00,00. It will keep reducing from then on –

10th year – Rs. 43,60,000

15th year – Rs. 11,30,000

The death benefit is equal to the sum assured – Rs. 50,00,000
My ViewBenefits in the Loan Protect plan get reduced from 7th year onwards else you have to take a fixed benefit policy which means paying a higher premium.

It is expensive compared to the term insurance plan .

The home loan protection and home loan are tightly linked. It will be difficult to port the loan if you have taken insurance without foregoing the insurance. In a term plan, you will have no such limitations on the insurance or on your loans.

Interest payable on premium –

If you do not opt for the single pay premium, the premium gets included in the EMI which has components of principal and interest on the loan amount and you will end up paying interest on the premium amount too. Moreover you will lose out on tax benefits on the premium paid.

Closure of home loan –

Home loans are usually closed before the full tenure. People pre-pay the home loan. If you take a 5 year home loan and a home loan protection plan for the same tenure and pay off the loan within 3 years, you will not get back the premium paid till now.

People also port the home loan from one lender to another. There can be issues related to porting if home loan insurance is involved.

Home Loan Insurance is different from Home Insurance or Property Insurance –

Property insurance covers the property against risks to property like fire/earthquake.burglary etc. But home loan insurance covers the risk of default in repayment of home loan. Some people might get confused between these two types of loans and end up buying the wrong insurance.

ReadWhat bankers can do Mis-sell Insurance?

If your bank asks you to purchase a home loan cover for the home loan, you can –

  • Inform them that you know that it is not mandatory to buy home loan cover to get a home loan.
  • Ask the bank to give a written document that home loan cover is mandatory to get a home loan. Since it is not mandatory, the bank will not pressurize you to buy it.
  • Reject the loan even if you really need it. The bank needs the business. It will come back to you asking you to take only the home loan and not the insurance cover.
  • Inform the bank about term plan that you have or intend to buy which can cover the loan payment default if any
  • Escalate the matter to higher the senior management in the bank. This will help in having written proof of the conversation and also change the offer from the bank.
  • Escalate the matter by filing a complaint to the Banking Ombudsman following proper procedure.

It is important to protect your dependents financially. But it is equally important to get the right kind of protection. You should understand the financial products properly before buying them. Let us know if you have faced similar issues when you had to go for a housing loan and how you managed it.

31 COMMENTS

  1. [Personal Experience – Could not make the institution not force me to take the loan without an insurance]
    Hi Hemant,
    Thank you once again for the article. I have had a similar experience with home loan providers. I kept denying and none of the financial institution came back. The market situation and emotion is different as we approach for loan only when there is a pressing need and do not have enuf time to react.
    In my case, after denying the major competitive institutions i was left with none and eventually have to settle down with an home loan insurance coverage. Unless RBI controls and circulates the policies that abides to all, we are at mercy of these institutions.

  2. I had taken home loan protection plan along with HDFC home loan. It is getting deducted in EMI. Shall i ask bank that i dont need further insurance , so that my EMI gets reduced?

  3. Wow, really an eye-opener. Thanks for this excellent info.
    This helps us to be careful while approaching for housing loans with financial institutions.

  4. I read your article very nice but needs more comparitive information by including other 100% Loan Guarantee Lowest Interest Rate & Instant Approval Nationalized Banks.We are Profession All Kind Of LOAN providers For Home Loan,Housing Loan,Construction Loan,Mortgage Loan,TakeOver Loan, Loan Against Property (LAP),TopUp Loan,Site Purchase Loan,DTCP Approval,CMDA Site Loan,( And )an For Cibil Defaulters ( Loan Rejected )( Loan Problems )( Low Salary Profile )( Loan Denied )

  5. Thanks a lot for this article…read this at just the right time…was about to apply for a home loan insurance today…felt like going though the internet for some advise and bingo !!! got he link of your article..
    Till now bank person has not mentioned anything about the insurance to me..not sure what is going on…

  6. I also taken loan from SBI and they sold me the insurance but somehow i managed to pay it by cheque at last moment. This year also they called me to deduct from my saving account but i refused. Hopefully i saved remaining 4 premiums of this insurance. Since it also passed the grace period so i want to know whether they can force me to pay premium at this moment?

  7. PNB Housing Finance is adding approx 2.65L for Insurance premium. They are not willing to agree with my request to not include that. What can be done?

    @Hemant Beniwal, great coverage. Helps a lot to plenty of users though very less acknowledge them.

    • @ Kartik Nadar, I would advise you to cancel the insurance policy (you can do this as per policy) within 30 days when policy gets issues and you will get complete premium in return..

  8. I have opted for a home loan in axis bank they r saying it is mandatory to have insurance for taking loan . I want 70 laks of loan if it’s compulsory to take insurance then how to proceed nd protect from unnecessary charges nd if insurance is not compulsory then wat to do

  9. Hi Hemant,

    I think u r too harsh on financial institution, which offer home loan insurance, because
    1. Future is uncertain, if there is only one bread earner in a family, who is paying home loan EMI, if something happens to him, like (death), no one wants to vacate the home, due to that person death. Anyways if he have insurance, the insurance company will assure him to repay the loan.
    2. It will make the lender and the client both safe…

    Is it not right? Is it a worst product?? I don’t understand your logic!!

    • Hi Karthik,
      I agree with your point “future is uncertain & we should have insurance to cover liability”. But why pay Rs 5 for something which is available for Rs 1?
      I am not sure if you have read the article. I have suggested a better alternative from the same financial institution.

    • I agree Karthik – while I totally believe in Caveat Emptor and I appreciate that Author is sensitizing the readers about malpractices that some institutions (or rather the sales people) may be following, it is not as one sided case of Home Loan Insurance being the worst product as brought out by author. And the price difference is certainly not 1:5. These Home Loan Insurance Products are slightly more expensive because these are Group Insurance where buyers of these insurance products becomes a part of Group Insurance taken by the Home Loan provider. There are multiple advantages of buying a part of Group Insurance – namely no medical checkups i.e. no individual underwriting, immediate and hassle free loan settlement in case of an unfortunate event (that’s what matters the most when one needs it), high claim settlement ratio (don’t have a fact to prove it – but one can understand that all banks are keen to cover their loans first), critical illness rider for a longer period, permanent disability rider etc. Many banks are also able to offer competitive interest rates because they are able to sale insurance along with it.

      Also if one opts for a one time payment of premium, the premiums have time value of money built in it. Banks’ interest in the loan taker going for one time payment premium is that they want to ensure that the Loan taker is fully insured for the time period of loan – Banks are kind of protecting themselves.

      Finally, adding the cost of premium to EMI, over and above your sanctioned loan limit, makes an expensive insurance product in the reach of the buyers who are generally overstretched at the time of buying their property. And this is one of the key reason that many home loan takers should evaluate this product instead of end up postponing their decision to buy insurance, at their peril.

      I am also told that loan porting is allowed under some of home loan protect plans in the market.

      Therefore, the smart step should be that one should obtain all the details about the Loan Protect policy being offered by the bank much in advance (banks sales people have a habit to push it at the last moment and create urgency around it) , and call up an insurance adviser/ competing insurance firms/ check online portals to understand what product serves their need the best and then go for that insurance product. Also one may go for a shorter duration Loan Protect policy – say 8 – 10 years if the loan is for 15 years. BUT DO COVER YOURSELF – DON’T REMAIN UN/UNDER INSURED

  10. That’s a good piece of information. Thank you, Hemant.
    I have a situation here, I have got a loan sanctioned for 30L from PNB and the associate insisted me to take the insurance. He did not mention anything related to the insurance written. Now after reading your post, I spoke to him if he can cancel the insurance. PNB says they cannot at this point of time as the cheques have been prepared.(On me further insisting to cancel, they also told that it would be a bad remark on them. Hence cannot cancel the insurance.) They are yet to respond. Please suggest how can I deal with them.

    • Hi Nrusheel,
      “Bad remark” is just a selling technique for financial institutions. Remind them they are in the business of providing loan – not selling insurance.

    • Please send them a written mail saying I don’t want to opt for any insurance and they have to then go by that.
      Verbally they will always try to enforce you to take the insurance. Ensure that you are putting the higher official’s in mail chain.

  11. Hi Hemant,

    I had got sanction of Home loan from Mutthut Home finance of Rs. 1330000/- & they are adding insurance premium of Rs.97801/- in a loan amount which will be recollected through EMI. I requested them to not add the Premium in loan amount but they are not ready also not giving proper information whether it is a single premium or should be renewed after some year. I also told them that I will buy it from other insurer but they are saying that they have tie-up with HDFC & I have to buy HLPP from them only. But I thinks the premium of Rs.97801/- for Only 1330000/- Loan amount is on very higher side. So kindly advise me what should I do & is there any wayout to reduce premium.

  12. I have taken 35 L housing loan last year. However i have not opted for any Protection insurance plan. My EMI is 36K.
    What would you suggest for my situation?
    Thanks
    Shyam

  13. Hello,
    I have recently applied for an home loan with DHFL of 60lacs and its in final disbursement stage. Now they have forced me to buy home loan insurance and home insurance of worth approx 1.5lacs and saying that they can’t disburse the loan without insurance. I have no choice except to agree on their condition since have to made payment to seller for flat purchase.
    Would like to know if I can cancel the Home loan insurance on later stage but confused since I heared that only life insurance and health insurance have free look period of 15days wherein someone can cancel the insurance and request for refund. Appreciate if you could suggest on this urgently?

  14. Sir, I am planning to take Home Loan from HDFC LTD. approx Rs.10 lacs, please suggest which insurance policy is best to be taken to cover home loan. HDFC is suggesting HDFC ergo HOme Surkhasa Plan.

    Thanks

  15. I am 40 years old and purchased a Home by taking Loan from HDFC bank for 24 Lakhs for 12 year tenure, Bank personnel asked me to buy Home loan insurance for 1.85Lakhs for 5 years which covers all incidents. I refused to do so, I just asked them for loan.

    Can you suggest me any insurance which will give risk cover and money back for a definite term untill my home loan EMI ends

  16. Hi , I have recently applied for loan in private housing fiance bank and loan amount got sanctioned but after the agreement of home they asked me to get home loan insurance at the same day else it will not go ahead.
    I was helpless at that time and got the insurance policy but after reading this article i have asked the to cancel this insurance policy and raised request within free look period.
    But bank denying it and pressurising me to go with same policy. I requested them and also explain I can attached my own term life insurance plan to insure home loan amount but they and not listing and forcing me to keep same home loan protection plan .
    Some amount of loan amount is already credited to builder so in this case can they hamper my home loan and Can i still have chance to cancel there group insurance policy and attach my own policy. Please reply asap. Thanks in advance.

  17. Hi i have applied for a loan from hdfc home loans. Person from hdfc had called me a month ago and informed me that your roi will be xyz and insurance will be mandatory in your case. I was in a meet so I said ok and disconnected. Now i thought during the time of 1st disbursment i will inform these people that i dont require any insurance, so now as per them as i have said YES a month ago over the call so now the file is approved and now i have to opt for it or else they will reject my file and I wont be getting any refunds on the same. So now where can i complaint regarding this or else if anybody can help me the mail ids where we can complaint. In need of a swift response.

  18. Hi, I have taken home loan 7 months back. Unknowingly the insurance is also included as part of the loan.
    I am realizing now, that the insurance amount is very huge, almost 3 Lakhs for 60L loan amount.
    Can I cancel my insurance now, as my EMI is already started since 7 months.?
    Or transferring loan to some other bank, by removing insurance is possible?
    Please help.

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