I’m 34 years old and recently took a home loan of ₹85 lakh for a 2BHK apartment, with a repayment tenure of 25 years. The bank is recommending a home loan insurance policy that would cover the outstanding loan amount in case something were to happen to me. I also researched and found much cheaper options online.
How exactly does home loan insurance work? Where should I buy it from? Since the loan outstanding reduces over time, does the insurance coverage decrease proportionately? What should borrowers look at, such as exclusions, the claim settlement process, and the premium structure?
—Name withheld on request
At 34, taking on a long-tenure home loan is a big milestone, and it is encouraging to see borrowers thinking beyond just EMIs and focusing on risk protection as well.
To address your questions one by one, let me start with how home loan insurance actually works. Home loan insurance is structurally similar to a term life insurance policy. In the unfortunate event of the borrower’s death during the policy tenure, the sum assured is paid to the nominee or lender and can be used to repay the outstanding home loan. The primary objective is to ensure that the family does not inherit a large liability during a time of emotional and financial stress, and that the home remains secure for them.
On where to buy it, borrowers today have two broad choices. Banks typically offer group home loan insurance bundled with the loan, while retail options are available directly through digital platforms. Retail home loan insurance plans often offer significant advantages over bank-bundled products. For instance, retail plans may attract zero GST compared to the 18 percent GST applicable on many group policies sold by banks.
In addition, when banks bundle insurance into the loan, the premium is often added to the loan amount, which means you end up paying interest on the insurance for years. Retail plans avoid this entirely. They also offer greater flexibility in choosing the premium payment term and frequency, allowing borrowers to align payments with their cash flows.
On your question about whether the cover reduces over time, the answer is yes. Most home loan insurance plans are designed as reducing cover policies, where the insurance cover decreases in line with the outstanding loan amount. Since the insurer’s risk reduces every year as the loan balance comes down, these plans are typically more affordable than level cover term plans with the same initial sum assured.
Finally, it is important to evaluate the insurer’s claim settlement ratio, as this reflects its track record in honoring claims. Understanding exclusions, especially those related to death due to certain causes in the initial policy period, is equally critical. The claim settlement process should be simple, transparent, and well supported. Borrowers should also examine the premium structure carefully to ensure there are no hidden costs or long-term interest implications.
Home loan insurance is typically more affordable than a regular term cover because the sum assured reduces each year in line with the outstanding loan. This makes it an efficient way to protect your family specifically against the home loan liability. At the same time, a separate term plan can be optimally structured to take care of the family’s broader financial needs, such as daily living expenses, children’s education, and long-term goals, without the added worry of repaying outstanding debts.
