Securing Your Debt With Mortgage Insurance

It's the year 2009, a year after the Lehman Brothers crisis; the world economy including the USA and Europe seems to be gloomy and back home in India the situation is no better. The job market scenario is bleak and employees across sectors are faced with salary cut / job loss and you are no exception to the rule.In the year 2007, seeing the rally in real estate sector and the handsome hike in salary over the past couple of years you have recently purchased a property by availing a home loan .You have already paid over 20% towards purchase the property. However with the responsibility of your family on your shoulder, you are finding it quite strenuous to pay your equated monthly installments (EMIs), on account of which you start getting sleepless nights, this takes a toll on your health. You have not paid your EMIs for the past one year and the financial institution which grated you the loan confiscates your home. If only you had you had adequate cover you could have saved your dream home.

Meaning & Riders

Mortgage life insurance policy / mortgage title insurance/ Home Loan Protection Plan (HLPP) is a policy that covers the borrower against the non-payment of EMI in case of death of the borrower. There are some policies which have riders of accidental death, disability, critical illness, job loss (max 3 EMIs) etc.

Types

There are two types of HLPP; decreasing term insurance, where the sum assured decreases with the outstanding balance of the loan until both reach nil; and level term insurance, where the sum assured does not decrease (in case of interest-only mortgage).

Premium Payment

Usually Mortgage title insurance is a single premium policy; however there are some variants for regular and limited premium payment terms. In single premium payment plans banks allow the borrower to bundle the premium amount with the loan amount.

Insurance Providers

HLPP usually lapse on repayment of home loan or demise of the insured. There are some policies which continue till the end of the policy term even though the loan is repaid, such policies are provided by life insurance companies. General insurance companies provide this cover along with home insurance (protection of your property against fire, earthquake and other perils). The premium for such dual benefit policy is naturally higher than pure vanilla HLPPs.

HLPPs v/s Pure Term Plan

Availability: HLPPs are generally not available in the open market just as any other term plan; they are usually clubbed with home loans taken from banks.
Surrender Value: As against a term policy, in the event of death of policyholder of a mortgage life insurance, the insurance company 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.
Cost Effectiveness: HLPPs are more expensive than pure term plans on account of huge percentile of surrender value of the remaining premium for single or limited premium payment plans. If your single premium was Rs 100,000 for 20 years and you prepay the loan after 8 years, you can surrender your policy to get Rs 30,000 (i.e., (50% X 100,000) X (12 / 20)) back.
Portability: These plans cannot be ported to other lenders as they are under the master policy between the lender and the insurance company.
Single v/s Joint cover: However in contrast to a term plan a single life cover can cover all the borrowers under a joint loan. You do not need to purchase separate term insurance plan for each borrower.

The purchase of Home Loan Protection Plan is not compulsory by law i.e. by the Reserve Bank of India, RBI nor the Insurance Regulatory and Development Authority, IRDA. It is the sole discretion of the home loan borrower. However the lenders, i.e. the banks or the dealers usually insist that their customers opt for a Home Loan Protection Plan so that their loan is secured. In fact they even sometimes refuse to pay the loan if the HLPP is not taken alongside as a protection tool. So, while purchasing a new policy, the lenders usually opt for a single premium HLPP where the premium is incorporated in the loan amount itself so that the premium does not pinch the customer at the upfront.

Nevertheless it’s important to have an insurance cover for the outstanding loan amount so that you do not leave your family with the burden of your home loan in case something happened to you! As it is they would be mentally traumatized without the financial burden. Thus it is very important that the loan is protected with a HLPP.

However it is not necessary for you to opt for a mortgage life insurance, a basic term policy with level sum assured would be more prudent and cost effective and would suffice a larger cause than just the home loan protection!