Choosing home loan protection plans

Sethu is the proud owner of a flat in Powai, but not many barring his wife know that he has sleepless nights. The 20-year loan for Rs 60 lakh taken for the house is haunting Sethu.

He worries that his family may find it difficult to service the loan in the event of his unexpected death. On default in the EMI (Equated Monthly Instalment) of a home loan, the lender takes possession of the house forcing the family to vacate. Now, is there a way out?

Yes. Life insurers have home-loan protection plans. Some general insurers too provide a similar cover.

One can also consider a term policy from a life insurer to cover loan outstanding. We compare the various options weighing costs and features of each.

How they differ in features

Home-loan protection plans cover the amount of the housing loan taken by a person. One has the option of paying premium as a lump-sum in one single payment or as EMI clubbed with the housing loan instalment.

On exercising the EMI option, the lender pays the premium amount to the insurer and collects it later from the borrower by adding it to the monthly loan instalment.

The sum assured on a home-loan protection plan can usually be claimed only on death.

However, some life insurers such as Kotak Life, however, offer plans (for higher premium) where claim can be made on critical illness or the borrower's permanent disability due to an accident. Home-loan protection plans from the general insurers do not cover death under natural reasons.

The policy here is basically a critical illness policy combined with features of a home insurance policy. ICICI Lombard's Secure Mind policy, for instance, offers cover for nine major illnesses, permanent disability/death due to accident and loss of job (three EMIs only covered). HDFC ERGO's home-loan protection plan covers damage to the property on fire and earthquake, loss of contents of the house due to burglary and covers the borrower on accident, critical illness and job loss.

However, what one needs to note is that general insurers do not offer cover for the whole term of the loan. It is mostly for first five years, after which the policyholder has to renew it.

A common feature of many home-loan protection plans is that they compute premium on the policy based on the loan amount outstanding each year.

This reduces overall cost of the cover to an extent. At the time of signing loan papers, the bank tends to market the home-loan protection plan, usually from the insurance arm of the same group to you.

Don't take up the product in a hurry, ask for time to compare products. Costs of home-loan protection plans vary widely between general and life insurers.

A term life policy can also be used as a cover for the home loan you have taken.

Take a policy for an amount equal to your loan amount and for a period equal to the loan term. Death due to any reason— natural/accidental/illness during the policy term will be covered and the sum assured will be given to the nominee of the insured. The benefit here is that the sum assured remains constant throughout the policy term and your family can use the excess of sum assured over the outstanding loan for other purposes.

How they differ in cost

If you are looking for the most economical way of covering your home loan, go for an on-line single premium pure term policy.

A person of 35 years age could buy a 20-year term life policy for a sum assured of Rs 30 lakh by paying a premium (single) of around Rs 60,000 from Kotak Life (e-term plan). Home-loan protection plans however come at a significantly higher cost. Sample these numbers:

Home-loan protection plan with SBI Life on same conditions as above would cost Rs 101,590. HDFC Life would charge a premium of around Rs 104,550 for the same policy.

The same plan from a general insurer would peg-up the buyer's cost further (as they have additional features- cover job loss, critical illnesses and permanent disability/death on accident).

On a home-loan protection plan from ICICI Lombard, the insured has to spend Rs 68,400 in first five years on premium. After expiry of five years, the policy has to be renewed again.

A term life policy with an annual renewal option would cost slightly higher than a home-loan protection plan from a life insurer. This is because the insured enjoys a sum assured that is higher in the former case.

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