Due to the increase in housing costs, it is now nearly difficult for a person to purchase a house/apartment without taking out a large amount of home loan. Since the home loan amount availed to buy a house comprises a large portion of monthly household income and if in case something happens to the sole earner of the family, it becomes difficult for the family to run the household and pay the home loan EMIs in such cases.Read more
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However, whenever someone wishes to opt for a home loan, the question, “Is life insurance compulsory for home loan?” persists. While it is recommended that as new homebuyers, you should get a term life insurance cover in accordance with your home loan to guarantee your family's financial security when you are not around, though it is not mandatory. At the time of taking a home loan, you can build a new financial liability and opting a life insurance plan to cover the liability of home loan will make sure that the legal heirs inherit the home and not the liability of home loan. This will help your loved ones avoid the dual pain of losing the regular income of the sole earner and to leave the house, in case an insufficient amount is available to discharge the unpaid home loan.
Below mentioned are the circumstance that explain the benefits of life insurance and explain why this plan is mandatory for home loan:
While the home loan is in itself a payment consisting of quite a few premiums, it sometimes takes up to a lifetime to fully repay the whole amount. And therefore, your family should not be burdened by the financial commitments you made in the unforeseen event of your untimely death. Under such circumstances, life insurance on home loan is mandatory, as it supports your family in your absence without having to worry about the house being taken away.
The majority of financial experts suggest choosing a life insurance cover that is sufficient to pay off a home loan in the long run as this will help the life assured’s family from the additional worry of paying home loan EMI payments. Also, the policy term needs to be longer than the time needed to repay the loan as it is required to maintain the term insurance plan in effect during the loan payback period.
Section 80C of the Income Tax Act of 1961 allows for tax deductions on life insurance premiums paid while repaying a home loan. You might hope that calamity never hits, but knowing that your most valued possession, your home, is safeguarded even in the worst-case scenario is definitely worth contemplating.
The life insurance bought along with a home loan also allows for customized premium payments, as you may go for single premium or annual premium payment policy. You can choose any of the premium payment modes as per your financial requirements.
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Having life insurance along with a home loan is a sound financial idea, but it is not compulsory. Neither the Reserve Bank of India (RBI) nor the Insurance Regulatory and Development Authority of India (IRDAI) has made it mandatory to purchase life insurance while applying for a home loan. Adding a term life insurance policy, coupled with a home loan, to your financial portfolio provides added security and peace of mind, but it may also be avoided.
In many cases, home loan buyers are in the final stages of loan approval when the bank imposes the additional cost of a life insurance plan on them. Few banks create pressure on new homebuyers by representing the non-compulsory nature of receiving a life insurance plan to cover liabilities of banks. Under such a situation, customers get stuck between buying the added insurance plan or risk a rejection of home loan.
Sometimes, the bank makes the buying process of life insurance plan easy by deciding on the single premium term insurance plan to the existing amount of loan. In such cases, customers don't have to pay out of their pocket and the life insurance price causes a small increase in the EMI amount.
If a homebuyer has a term plan then you can add it with an amount equivalent to that of the home loan. Don’t adjust for the liability of home loan into the current term cover as it will compromise with your family requirements. As per the financial experts, you should have a cover of at least 10X to 20X of annual income. This means, if you already have a 80 Lakh term insurance coverage and the Rs. 30 Lakhs of loan, then get an extra cover equivalent to the loan amount of Rs. 30 Lakhs.
Thus, if you don’t have a term plan, then estimate the total amount that your loved ones would require including the liability of home loan and then purchase it the day the loan is sanctioned.
Quick Comparison Before Policy Purchase - It is recommended that you do not get life insurance from the same financial organization that has given you a home loan. You must compare several term insurance plans from various insurers and select the one that suits you most effectively. This increases your chances of getting the right policy at a low premium rate and shortlist a few life insurance policies available in the market and compare them to the one offered by the financial institution issuing the home loan. Policybazaar gives a comparison of the top 15+ insurance companies offering great insurance plans, so that you can choose the best policy for yourself.
Legal Knowledge - You must be aware about the RBI and IRDAI recommendations so that you are not fooled by insurers. If a financial institution charges much higher premiums than other insurers in the market, you might refuse to get home insurance from them and let them know about the regulations issued by RBI and IRDAI.
Apart from these above-mentioned points, there are other points need to consider while buying life insurance for home loan:
Always ensure that if you choose to buy a term plan or home loan, then you don’t need to purchase it from the bank that is disbursing your home loan. You can ask your bank to provide you a premium price for an insurance plan to understand how your liability changes towards the bank. Compare quotes from other insurers and make an informed decision.
If you want to transfer your loan to another bank after some time, you need to buy a term plan that is not associated with the current lender.
Consider your current life insurance policy coverage. Is the sum assured sufficient enough to pay for your home loan and your family’s expenses in case of your absence? If it doesn’t fit your budget, enhance your financial portfolio with a right term plan to pay off all your liabilities.
The decisions related to finances should always be taken carefully by carefully considering home loan amount, existing life cover and term insurance plan premiums. So to conclude, a buyer must first study wisely about all the terms and policies before choosing a term life insurance along with a home loan and compare the plans provided by different companies so as to choose the best one in the end.
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