If you are in the process of taking a home loan to purchase a house, it is very likely that you are asked to compulsorily buy insurance along with it. It is so much the norm that home buyers rarely question this practice of the banks. True, having adequate insurance cover is a very sound risk management practice recommended as part of good financial planning. But it is within your right to consider your situation holistically and take control of the process, rather than go with the product pushed to you.

Fenced in

The first point to note is that despite what the bank offering the loan may want you to believe, insurance is not a regulatory pre-condition for a home loan. You must note that the Reserve Bank of India has not issued any directive regarding insurance with mortgages.

Not just that, even if you want to take insurance, banks often restrict your choices by promoting a particular insurance company rather than offering choices. And they may also try to sell features that limit your flexibility while increasing your cost. For example, they may add householder’s insurance – which covers damage to property and belongings due to natural disasters. This covers very different risk scenarios and may not be helpful in some cases – say, if the property is under construction.

A product that is popularly marketed is ‘loan protection plan’. This offers insurance on the outstanding loan amount and the coverage typically decreases over the years, as the loan gets repaid. This is also often a single premium plan with the option to pay the premium with the EMI. The benefits may be touted as no extra cost to get the loan insured. These may seem like a great deal, as the insurance is ‘just right’ to cover the loan and no upfront costs.

But there are many hidden downsides. For one, if you prepay the loan earlier, you are not covered for the loan tenure. Also, if you refinance the loan with another borrower, the insurance cannot be ported and you have to take a new insurance cover. Often, you cannot get loan facility against the policy.

There may also be bundling of critical illness or disability cover. The catch here is that these are typically not for the full loan tenure, but stop after a shorter period of, say, five years. To save cost, it may be better to buy these for longer tenures, early on.

Getting cover

That said, it is important to acknowledge the need for insurance cover as a risk mitigation strategy. You must assess your financial situation, including your liabilities and projected expenses, health risks and valuables that may be vulnerable to arrive at the types, features and amount of cover you need. The minimum cover amount you need should cover the loan dues on the home in case of an eventuality so as to avoid payment defaults leading to a liquidation.

Often, all you may require is simple-term life insurance. If you already have one, be sure to check if it will still suffice, as your liabilities increase with a new home loan. You can assign an existing policy to the lender against the loan, rather than have to take a new one.

And if you prefer, you can consider a householder’s policy that covers the building and belongings against events such as fire or burglary. These are very inexpensive – about ₹200 per lakh of sum insured. Other products such as personal accident cover and critical illness may be often optional. Be sure to check if your employer’s coverage includes these already and if it is sufficient.

You must also shop for the best products as other insurers may offer features that may be beneficial. For instance, some loan protection plans come with flexible tenures – as low as five years. Likewise, you must read the fine-print in the policy offered, as there are many exclusions in the coverage that may limit your benefits.

Take action

If the bank insists that insurance is mandatory as per regulatory guidelines, you can approach the customer grievance cell of the concerned bank. If it is not attended within a month, this can be escalated to the banking ombudsman.

Sales tricks
Promoting specific plans
Bundling extra coverage
Single premium payment

It is likely the bank may insist that the insurance is compulsory as per their internal guidelines. You can check if you can assign a policy - that you already have or take now - towards the loan. It is preferable to do this, rather than totally bundle the insurance to the loan. You have the right to state that customers should be allowed to exercise their choice and there cannot be linkages between loan and other services from the bank.

The author is an independent financial consultant