Securing Your Debt With Mortgage Insurance

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!