Vishal Sinha, 38, an engineer, was surprised when his banker asked him whether he had adequate life cover. "What is the relation between a home loan and life cover?" he asked. His banker's response - "It is better to have adequate life cover or home loan insurance because, if something were to happen to you, then your family would find it difficult to pay back the loan."
No wonder banks are promoting such products aggressively. As the HDFC Standard Life advertisement has it - "Mr Kumar rahe na rahe, Kumar sadan hamesha rahega." Says Sunil Rohokale, head of home loans, ICICI bank, "Once the customer agrees to opt for a home loan from us, we advise him to buy insurance to take care of the liability in the event of some misfortune."
There are different kinds of products to insure a home loan. Some companies offer plans where the sum assured keeps falling with the loan amount. That is, if the insured loan amount is Rs 50 lakh for the first year and after the first year, the outstanding amount is Rs 48 lakh, then the insurance cover also comes down to Rs 48 lakh.
In many such policies you only have to pay premium for a part of the plan period to get covered for the entire tenure of the loan. For instance, in HDFC's home-loan term cover assured plan you have to pay premiums for two-thirds of the policy period.
Others offer products where the sum assured stays intact. So in case of a misfortune, the home loan outstanding is paid first and the rest is given to the family of the deceased.
Also, many of these policies allow you to pay a one-time premium or the company pays the lump sum and you pay it back in instalments. "Though home loan and insurance products are separate, the premiums are clubbed with the home loan instalment," adds Rohokale.
But financial planners say that a pure mortgage insurance is not always necessary. Says Suresh Sadagopan of Ladder 7 financial services, "One can opt for a term plan instead of a mortgage insurance product." His reasoning is that more often than not, home loans get prepaid in India. And in such a case a home loan insurance product becomes expensive.
That is, if you have taken a 15-year home loan and pre-pay it in 10 years, the premium on the 15-year loan is wasted. Also, he says that the premiums are not very different thereby making them equivalent in nature.
The choice for the home buyer is clear - either get adequate life cover or a mortgage insurance product.
