Jun 24, 2018

Purchasing Insurance with Home loan is not compulsory

Stay Alert Series - 23

Imagine you are walking in to Bank Branch for Home Loan requirement. You have submitted all necessary KYC documents as per Banks checklist, despite of your good credit score suddenly Lender is insisting on purchasing an Insurance plan. Some of the lenders who will not fund you if you are not purchasing their Insurance plan.

As per current scenario neither the Law nor the regulatory Authorities such as RBI and IRDA have made the purchase of Home loan protection plan with a loan mandatory. Although, if you are planning to have one can always compare with other Insurance companies to ensure getting right plan which is cost effective. Purchasing an insurance plan is the sole discretion of the buyer and borrowers cannot be forced to purchase such plans.

Let’s understand which common tactics are generally Lenders apply:

What Lender insists on?
Easy and simple way for lenders to make you buy Insurance plan is single premium term insurance plan. They offer to add the single premium in loan amount which will not impact you directly but indirectly. This way the borrower does not have to pay anything upfront and still get the loan insured. As a result, the equated monthly installment (EMI) amount increases a bit without pinching the pocket much.

How much would be the premium amount?
Let's take an example, if someone wants to cover on Rs 60 Lakh loan for 15 years and looks to purchase a term insurance plan. On an average the annual premium for Rs 60 Lakh for 15 years is Rs 6,400, i.e., approximately Rs 90,000 will be paid over 15 years. Instead, the single premium comes at Rs 68,000 for a cover for 15 years. Insist lender to share the Insurance premium and don’t forget to compare the premium with other Insurance companies.

Ensure that loan is sufficiently covered?
Purchasing a home loan creates one's liability. If in case the borrower dies the liability to pay off the loan falls on the surviving family members. Having an insurance cover will serve the purpose and help meet the financial liability. In such a situation, a term insurance plan, which is a pure risk cover plan, suits the most as they are low-cost, high-cover plan with no maturity value.

What are the Drawbacks involved?
Without raising the EMI considerably, the deal looks bright. However, remember, there will not be any tax benefit available to you on the premium amount. In case you buy a term insurance plan, the premium paid qualifies for section 80C tax benefit. "Also, if they are a single premium policy bundled with your home loan, you would not be able to port your insurance plan if you ever switch your lender due to specially designed product offered along with Home loan.

How we can handle the situation?
At times, lenders may refuse to give you the loan unless one gets it through them. You might give in as restarting the entire exercise of searching the right lender which can be rather tedious. So, what do you do in such a situation? "If you are being pressurized to purchase Insurance plan along with Home loan, communicate to the lender that you know that it is not mandatory to buy home loan cover to get a home loan. Also, request them to give a written document that home loan cover is mandatory to get a home loan. This will deter them from pushing any non-mandatory products.

If the lender is still adamant and not willing to sanction the loan amount, it's better to approach the higher officials of the Bank or Financial Institution. "Reach out to the senior management in the Bank regarding the matter. If none of this helps, you also have the option to raise a complaint to the Banking Ombudsman following proper procedure.

However, if you do not have a term insurance plan, estimate the total amount that your family would need including the home loan liability, and then buy it the day you have the loan sanctioned. Remember, the additional cover will only be for the tenure of the loan. Once the loan outstanding becomes nil or when it is paid off, drop the term plan earmarked towards it.

Stay Alert and Stay Safe.

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