Securing Debt With Mortgage Insurance

What is Mortgage Insurance?

Mortgage life insurance protects a mortgage titleholder or lender if the borrower fails to make payments, passes away, or cannot meet the mortgage’s contractual obligations. To put it simply, mortgage meaning refers to a loan taken against a property, where the lender holds the right to the asset until the loan is fully repaid. Before choosing the best term insurance plans for home loans in India, you should understand the importance of term insurance for mortgage protection.

Let us see how you can secure debts with mortgage insurance in India:

What is the Need for Home Loan Protection Insurance?

Everyone who has availed of a home loan should have a term insurance for home loan protection in place to secure their loved ones against the liability of debt repayment in the event of the policyholder’s unfortunate death. This provides you and your loved ones with financial security and peace of mind, knowing that the debt repayment will be taken care of in the absence of the main income earner.

Let us see the types of insurance you can buy to secure your loved ones.

What are the Types of Insurance You Can Buy to Secure Home Loans?

There are two types of insurance you can buy to secure yourself and your family against debts in your absence.

• Life Insurance Plans: This is an insurance plan that protects the life of the life assured against a variety of uncertainties for the entire policy term. In case of the policyholder’s death during the policy term, the nominee will receive the death benefit amount, which they can use to take care of their financial obligations and pay off any remaining loans.

• Home Loan Insurance: Home loan insurance, or the home loan protection insurance, protects the nominees against outstanding debts in case something happens to the loan borrower. With this insurance, the insurer will pay off the remaining loan amount in case of the policyholder’s death during the policy term.

How Can Life Insurance Cover Home Loan Insurance Risks?

Life insurance plans like term insurance can help you secure yourself and your family against home loan risks in the following ways:

• Affordable Premiums: A life insurance plan can cover home loan protection risks at highly affordable premiums for a long policy term. For example, you can buy the best term insurance plan for 2 crore life cover at premiums starting from just Rs. 699 per month.

• Fixed Cover Amount: The cover amount stays constant throughout the policy term in life insurance plans. Since the cover amount remains fixed in life insurance plans, it is the preferred option for most policyholders.

• Protection for Family: The payout from life insurance in case of your death can help financially stabilise your family in their time of need. Without life insurance, your family may be burdened with home loan repayment while suffering through the grief of losing a loved one.

• Security of Assets: You can secure your assets with different types of life insurance, as in case of your unfortunate death, your family can use the payout to pay off the home loan. Alternatively, if you do not have mortgage insurance in place, your family may have to sell your assets to pay off the loan amount.

• Peace of Mind: Life insurance can provide you with the peace of mind that your nominee will receive the benefit amount in case of your untimely death and use the amount to pay off the remaining loan money.

• Tax Benefits: You can claim life insurance tax benefits as per the prevailing tax laws under sections 80C and 10(10D) of the Income Tax Act, 1961.

What are the Benefits of Mortgage Loan Insurance?

Here’s a simple breakdown of why mortgage loan insurance can be an important financial safeguard:

Financial Protection:
It ensures that the outstanding home loan is paid off if something happens to the borrower, preventing the loan from becoming a burden on the family.

Asset Security:
It protects your home from being repossessed by the lender, allowing your family to retain ownership without any disruption.

Reduced Financial Stress:
It frees your dependents from managing EMIs during emotionally or financially difficult times.

Long-Term Peace of Mind:
It offers the assurance that your home loan will not impact your family’s stability in your absence.

Flexible Payment Options:
Some plans allow single-premium or regular-premium payments, making it easier to choose what suits your budget.

How Does Home Loan Protection Insurance Work?

Home loan protection insurance (also known as Mortgage Insurance) is designed to pay off or reduce your outstanding home loan balance in the event of your death or serious disability during the loan term. It acts as a safety net, ensuring that your family isn’t burdened with repaying the home loan if something happens to you. Here’s how it typically works:

• Coverage: The insurance against home loan covers the outstanding home loan amount. As the loan reduces over time, the coverage decreases accordingly.

• Payout: If the policyholder passes away, the insurance company pays the outstanding loan directly to the lender, relieving the family from financial stress.

• Premium Payment: You can pay a one-time premium at the start of the insurance against home loan or opt for regular payments, depending on your financial preference. You can use a mortgage life insurance premium calculator to get the estimate premiums applicable for your profile.

• No Additional Burden: Since the payout goes directly to the bank, your family doesn’t have to worry about dealing with the home loan debt.

• Optional Riders: Many home loan protection insurance plans offer riders like critical illness or disability coverage to further enhance the home loan protection plan.

What is the Mortgage Protection Clause in India?

In India, there isn’t a formal legal clause titled “mortgage protection clause”, but the concept is widely applied through mortgage insurance mechanisms that protect home loans in the event of a borrower’s death.

Below are the common ways a mortgage protection clause works in the Indian context:

1. Home Loan Protection Plan (HLPP)

   A Home Loan Protection Plan is a type of term insurance linked to your home loan. With this, the Mortgage Protection Clause ensures your loan gets repaid if something happens to you.

   • Insurance cover equals your loan amount.

   • The sum assured reduces every year to match your outstanding loan.

   • In case of death, the insurer directly pays the bank, so your family isn’t burdened.

   • Usually offered as a single premium policy, bundled with your home loan.

2. Assigning a Term Insurance Policy to the Lender

   If you don’t want to buy HLPP, you can assign your regular term insurance to the bank.

   • You purchase a term plan with sufficient cover.

   • You assign the bank as the first beneficiary.

   • On death, the insurer clears the loan first, and any remaining amount goes to your nominee.

   This approach to the Mortgage Protection Clause gives you more flexibility and better control over your insurance.

3. What Do the Regulators Say?

   • RBI Guidelines: Borrowers cannot be forced to buy insurance from a specific insurer or bank partner.

   • IRDAI Guidelines: Insurers and banks must ensure transparency in selling loan protection plans, including cost and terms.

Mortgage Insurance vs Mortgage Protection Insurance in India

In India, "mortgage insurance" (also known as a Home Loan Protection Plan or HLPP) and "mortgage protection insurance" are often used interchangeably to refer to the same type of policy, which primarily protects the borrower's family from the burden of loan repayment in case of the borrower's death or disability. However, the term "mortgage insurance" can also be used in a different context (as in other countries like the US) to mean a policy that protects the lender if the borrower defaults on their loan. 

Here is a breakdown of the common types of insurance related to home loans in India:

Key Takeaways for People Wanting Mortgage Protection 

• Focus on the coverage: When taking out a home loan, the insurance most commonly discussed in India under names like "Mortgage Insurance" or "Home Loan Protection Plan" is designed to ensure that if something happens to you (the borrower), your family is not burdened with the debt.

• Alternatives: Instead of an HLPP bundled with a loan, many financial planners recommend purchasing a separate, sufficient term life insurance policy. The payout from a standard term plan goes to your nominee, who can then use it to clear the home loan and cover other family expenses, offering more flexibility.

• Property protection: Remember that the insurance protecting your loan liability is different from the insurance protecting the physical house structure itself. You generally need both for comprehensive security. 

Is Life Insurance Better Than Home Loan Protection Insurance?

The choice between buying life insurance or a home loan protection plan depends on a person’s personal preference and needs. Let us take a look at how the home loan protection insurance, or the HLPP vs term insurance differ from each other.

• Affordability: Life insurance plans are slightly more affordable for the same sum assured than home loan protection plans. The low mortgage insurance cost allows you to ensure protection against home loan debts in your absence.

• Comparability: Life insurance plans can be compared online and purchased from an insurer of your choice. You might not get the option of comparing with home loan protection insurance as banks usually partner with an insurer, and you can purchase only the specific plan offered.

• Accrued Interests: Life insurance premiums can be paid separately and do not accrue any interest, whereas home loan insurance premiums are included in the amount paid for the total loan amount, which increases the EMI.

• Maturity Benefits: Once you have repaid all the premiums for the home loan insurance and the loan is paid off, you will be eligible to receive no maturity amount. With a life insurance plan, you can use the applicable maturity amount to pay off the loan and use the rest to fulfil your financial goals.

• Cover Amount: The cover amount in home loan insurance decreases as you keep paying the principal amount. In life insurance, the cover amount remains the same and can be used to pay off the remaining loan by your family members. 

• Surrender Value: As against a life policy, in the event of the death of the policyholder of a home loan protection insurance, the insurer settles the outstanding loan with the bank on behalf of the policyholder. Any excess funds after settling the loan are provided to the nominee of the borrower.

• Portability: Home loan protection plans cannot be ported to other insurers, as they are purchased under the master policy between the lender and the insurance company.

• Single v/s Joint cover: However, in contrast to a life insurance plan, a single life cover can cover all the borrowers under a joint loan. You do not need to purchase a separate mortgage insurance for each borrower.

Not only that, the nominee in life insurance can use the amount to pay off the loan debts and use the remaining amount to take care of their financial needs, like paying rent and paying child’s fees. Whereas, in home loan insurance, the insurer will pay the entire sum assured to settle the debt and nothing more. Life insurance for home loans comes with a long policy term and doesn’t require renewal, which makes it hassle-free compared to the home loan insurance offered by general insurance companies, which have to be renewed annually.

Difference Between Home Loan Insurance and Term Insurance

Both home loan insurance and term insurance are essential types of insurance but they serve different purposes. Here’s a comparison of term insurance vs home loan insurance plans:

How Home Loan Insurance Works with Joint Home Loans?

When a home loan is taken jointly, typically by spouses, family members, or business partners, both co-borrowers are equally responsible for repaying the loan. In such cases, home loan insurance can be structured in one of the following ways:

1. Individual Coverage for Each Borrower

Each co-borrower takes a separate policy for their share of the loan. If one of them passes away, their policy covers their portion of the loan. The surviving co-borrower must continue to repay the remaining share.

2. Joint Coverage (Shared Policy)

A single home loan insurance policy covers both borrowers. If either of them passes away during the policy term, the insurer pays the outstanding loan amount in full, relieving the surviving co-borrower from any repayment burden.

3. First Death Basis vs. Second Death Basis

• First Death Basis: The policy pays out upon the death of the first policyholder, and then the coverage ends.

• Second Death Basis: The payout occurs only after both co-borrowers have passed away (less commonly used in home loan scenarios).

Who Should Consider Home Loan Insurance in India?

Home loan insurance is not necessary for everyone, but there are certain situations where it may be highly beneficial. Here’s a quick overview of who should consider buying mortgage insurance:

What is the Claim Settlement Process in Home Loan Insurance?

Filing a claim under a home loan insurance policy ensures the repayment of the outstanding home loan in the event of the insured borrower's death. Here’s how the mortgage protection insurance claim process typically works:

1. Notify the Insurer

The nominee or surviving co-borrower must inform the insurer about the claim as soon as possible. Most mortgage insurance providers have online and offline channels for claim intimation.

2. Submit Required Documents

Key documents required to claim mortgage insurance plans include:

• Claim form (duly filled)

• Original policy document

• Death certificate of the insured

• Identity and address proof of the nominee

• Bank loan statement showing outstanding amount

• Any additional medical or legal records if requested

3. Verification by the Insurer

The insurer will verify the documents, investigate if needed, and confirm that the claim falls within the policy terms.

4. Claim Payout

Once approved, the insurer directly pays the outstanding loan amount to the lending bank or financial institution. This settles the home loan liability and relieves the family of repayment burden.

5. Communication to Nominee

The nominee or surviving co-borrower will receive formal communication of the claim settlement. If there's any surplus amount (if the sum assured exceeds the loan), it may be paid to the nominee, depending on the policy terms.

Final Thoughts

You can either buy life insurance or a home loan protection plan to secure yourself and your family from the debt that might befall them in your absence. It is important to have at least one of the two plans to secure the financial stability of your family in case you are unable to pay the loan off. You can compare the benefits and features of both types of insurance and buy the one that suits your requirements the best.

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