A home is one of the biggest investments of your life. In most of the cases, investors take a home loan in order to buy the house.
When a home loan is taken, it essentially puts your house on mortgage. The house is owned by the lender as the lender has paid you a loan amount so that you can purchase the property. It continues to stay with the lender till you fully prepay the home loan amount.
But what happens if destiny strikes and you die ? In order for you to leave behind the home for your loved family members, you should have taken some kind of insurance which would ensure that the home stays with your family.
That motive can be achieved by a home loan insurance or term insurance. The former is also called home loan protection plan (HLPP).
The question we have today is which one is more suitable to do the job ?
How does term insurance work ?
When you take a plain vanilla term insurance of a fixed sum assured, you pay a premium each year for the duration of that policy. The fixed sum assured, in this context can be the loan amount which you have taken to buy your house.
If you survive the policy duration, the policy terminates, you lose your premiums and everyone goes home (pun intended) happy.
Should the heavens above generate a liking to you and decide to terminate you and you die, your family members get paid the sum assured from the insurance company. The family members then pay the outstanding loan amount to the lender and make the house is free from the clutches of any bank or housing company. If the outstanding loan amount is less than the sum assured, your family gets to keep the difference.
How does a HLPP work ?
It is common knowledge that with time, as and when you pay your monthly EMIs (Equated Monthly Installments), you decrease your home loan liability. So if you have a home loan of say 20 lakhs for 20 years, you will owe less to the bank 5 years down the line and even a lesser amount 10 years later. As you approach the 20 years timespan, you pay more and more towards the principal.
How about having a insurance that acts like term insurance but the sum assured is matched to the outstanding liability of your home loan, which is the principal outstanding. That is what a HLPP does.
So if you think for a moment, the sum assured or the life cover in a HLPP decreases with time and at any point of time is equal to the outstanding principal as per the home loan amortization chart.
Check the below for a home loan of Rs 20 lakhs for 15 years at 11% rate of interest. As you can see, the total principal that you pay in each year is increasing and the interest is decreasing and so the outstanding home loan liability is also decreasing.
The life cover or sum assured in a HLPP matches at any point of time to this outstanding loan amount.
Home loan - 20 lakhs for 15 years at 11% interest
Which one is better among home loan insurance or term insurance ?
A term insurance is a no nonsense insurance policy – plain, easy to understand, cheap and the best form of covering liabilities. It is recommended by financial planners world wide.
The issue with HLPPs is the way it is sold in India.
It is in the banks best interest to sell you a home loan protection plan as they need to ensure either you or the insurance company pays their loan back to them. The issue is that they bundle the premium, usually a single one time premium applicable when you take the home loan, with the loan itself.
So, if you have a loan of Rs 20 lakhs and the single premium comes to Rs 25,000/-, the bankers will promptly make your loan amount as Rs 20,25,000/- ! So you end up paying extra EMIs for the Rs 25,000/-.
And when you do this, you lose on the tax benefit because the premium was not paid by you – the tax laws require you to pay the premium to avail of any tax benefit.
- Image Courtesy – The Economic Times
Also, when you transfer the home loan to another lender, you are sure to run into issues.
Being a single premium policy, you have already paid the premium upfront so should you decide to close out the home loan or prepay part of it, you have lost the premium you could have saved had a regular yearly payment policy been selected. Had you gone in for a term plan, it would continue without being dependent on such factors.
Last but not the least, complexities arise if your home loan tenure increases because of higher interest rates or you top up your home loan – then the single premium insurance already taken might not be enough to cover the outstanding liability. Remember the HLPP was fixed for a duration and if the tenure of the home loan increases, the home loan protection plan will obviously not cover the extra years added !
Apart from the single premium option, note that HLPPs also have the option of paying the EMIs yearly quarterly or monthly as would be the case for a vaniall term plan. However, the lender clubs the premium EMI with the EMI of the house.
I did a lot of websites to dig out the costs for such policies but hardly any of them have much to display. However, I did find a few articles on my favorite reading sites and I have used a sample from one of them to illustrate the cost difference.
As you can see, the term plans are cheaper but not by a huge margin. So while cost can be a differentiating factor, it should not be carry much weight.
Which gets me to the most important deciding factor which we keep saying here repeatedly here – keep things simple in personal finance, bundling products is fine but an ordinary investor can live his life peacefully with simple financial products. Avoid the HLPP and go for term insurance separately.
So, were you saddled with such an insurance policy ever and which one from home loan insurance or term insurance would you go for in the future ?
My cousin who went in for a home loan recently told me that his bank forced him to buy the HLPP. Is this legal? Can I not tell the bank I will show them the term insurance documents after which they could sanction the loan?
Most of the time bank employees are creatures of habit. Just because they are used to doing things one way it becomes the rule for them. They refuse to revisit the rule book. Are there any perks for employees to sell the HLPP with the loan?
There must be some commissions or kickbacks for sure.
Another plus point is that they are able to cross sell another product with a home loan – so that is one stone 2 birds.
The rule is not legal. You can simply refuse. I took a home loan from HDFC last month, they tried to shiv it down my throat, I politely told them this ain’t a rule and that RBI does not mandate it and a forceful selling could result in banking ombudsman parachuting themselves to resolve the case – I got the loan without the add on product.
The home loan officers and the branch managers of banks like SBI, that sell multiple financial products, are also given sales targets to sell their insurance and other products. So, that’s why they try and force customers to buy HLPP, ULIP and other products.
And yes you can always stand firm and say no otherwise approach banking ombudsman.
Good explanation, I think it makes sense to buy a term plan against your home loan. I did the same when i took a home loan few years back. HDFC was offering me HLPP but i promptly refused them saying i already had a term plan to cover the same.
Good stuff Rakesh.
When i took HL, i was forced to take HLPP. and currently i am paying for that. many of my friends are brainwashed when they took HL, They were issued with HLPP.It is like a trap. Very few can escape from it…
I think I agree to your statement that very few can escape it. That is because very few know of the rules of the game. Constant awareness and education is a must for such things.
I am sure you were sold a single premium policy.
I have been a victim of foreceful selling of HLPP from SBI. At that time I was unaware of other options and I just agreed to what they offered since I was in a hurry to take the loan.
The bank also sold me a ULIP to bypass the guarantee clause [I don’t know if such thing exist] but it got rejected because of some error in the form and my cheque came back :).
But I think it does not make much difference between the two options as far as cost is concerned. If it is added in the HL you might not feel the pinch of extra premium payment, you may feel it as part of your EMI. On the other hand taking term insurance is of course simpler to manage and you can claim tax benefits as well.
With term insurance you also have the option to negotiate on partial payment of the home loan. In case of demise of the sole earner of the family, I am sure banks would consider the situation and a deal can be made.
Hi Vivek, did not quite understand the last 2 statements. are you able to clarify ? The differential costs are not too huge as you rightly say.
What I meant was that family can ask for some rebate from the bank while clearing the home loan with term insurance money. I think banks might consider it in some situations.
Thanks so much for this article. Since long time I wanted to research about this on net, you saved my lot of time :).
Ya term plan looks good to serve this purpose (HLPP should charge less as the sum assured gets reduced with time 😉 ). However, I have one question. At the time of claim, do both work same way? I mean like in term insurance, if some information is given wrong and some problem happens, it might get rejected in some cases. In case of HLPP, do you get claim without any problem or it’s the same as term. If it’s same then term insurance still remains the winner here.
At the end of the pad, the HLPP is a term plan in itself. So yeah,most of the terms and conditions applicable to a pure vanilla term plan are also applicable to HLPP.
You won’t get any claim [term or home or any other] without any problem my friend 🙂
Sir where have you been, no contributions for so many days ? Project mil gaya kya ?
No sir, have been fighting to get one 🙂
I am not getting enough time in office to come online and at home as the son is growing he is taking up most of my time.
But I am trying to catch-up and I shall keep coming back 🙂
Welcome back – you are an important reader my friend.
What I found out is that HLPP has some additional benefits as compared to term plan. HLPP comes with disability benefit, loss of job and critical illness. These are not covered under plain vanilla term plan. But as everybody rightly said banks simply force it down our throat. I resisted initially while taking a home loan. The loan officer then became restless and tried to tell me that they will not sanction the loan unless I agree to buy HLPP. I gave up since builder started putting pressure on me to pay up. I later realized it might be tactic of ICICI bank as they had a tie up with builder. Another problem with HLPP is it is a single premium policy so you lose out if you switch to another lender. Also HLPP I have got does not cover me for 20 years but only for 5 years. ICICI told me that they do not have a policy that is valid for 20 years. I have to renew it after 5 years by paying additional premium. All in all I felt lenders take full advantage and try to extract maximum money out of the customer. Does anybody have a similar experience? How can we fight this menace?
I am sure you are not the first one.
I think they cannot force it down your throat.
Talk to the branch manager and escalate via their grievance cell and ombudsman.
Hi, Nice article. But can u suggest a good term insurance that will give life cover+critical illness cover.
@Anil,
Why don’t you buy online term insurance, they are much cheaper then the traditional ones. Aviva, Religare,ICICI, HDFC and many more offer good term plans online. Best to check and compare which suits you.
As for critical illness it is better to buy that policy separately.
I would agree with Rakesh. Thanks Rakesh.
Most of the life insurnace companies provide that so check on their websites.
Hello Sir,
I opt HLPP with Home laon and now i transfer my home loan to other Bank. so please tell me can i transfer my HLPP to other bank.
Thanks,
Praveen
@Praveen,
HLPP was with a particular bank, So you cannot transfer it. Why don’t you check with the other bank where you are getting your home loan transferred. Instead why not buy online term plans, they are very cheap too.
Thanks for such a knowledge sharig article, any body who buys a property for first time come across such new jargands / new plans which he / she founds to be a waste of money and time at a later stage., but cant help it have to move with the flow. Reading such artices really gives a confident to talk with a banker or financial consultant so that no body fools you forcefully selling it.
Thanks for sharing all your views and for the article. I now saved a big money
Thanks, glad you found it useful. Kindly share with others.
I switched my loan to SBI and a HLPP Rin Raksha policy has been bound to me.
There are both advantages and disadvantages of term and HLPP policy as Vivek said.
It depends on individual to chose wisely….the main advantage is If it is added in the HL you might not feel the pinch of extra premium payment, you may feel it as part of your EMI.
And if you have enough money to pay premium then search and compare other options but don’t forget to protect your loan.
But one should never accept hlpp blindly, you should always oppose as a aware investor and raise the grievance if needed. This is mostly done by SBI officials. so try to get contacts of higher officials like AGM and escalate the issue.
We should stop this menace…..!!
Yeah Ankit, very well said. Thanks, I totally agree with you.
Hi,
Vivek while i understand your point in case of a life tragedy, what if the home itself has been struck with fire, deluge or earthquake or riots…and the borrower is safe..
To put it simply, HPP protects you from that (HFDFC Home insurance doesnt cover you from deluge) and term insurance doesn’t ….will going for home insurance and term insurance as a combo better than and cheaper than HPP..
Your views …Kavita
Hi Wealth Wisher,
Thanks for providing such a important information on Homeloans. I want to know how to say no to Home loan insurance, as i am looking to take a home loan from SBI, where an officer said to compulsariy take the HPP. Can you provide me any circular from RBI that it is not mandatory to take HPP while home loan.
Secondly, if we are not taking any HPP and in order to make be sure from risk of natural calamity which type of insurance will be helpfula nd the Bank Agree in this case.
Regards,
Sandeep
is it compulsory in indiabulls home loan to take insurance
Not really but they force it upon you – let us know if you find out otherwise.
Hi, I think Home Loan Insurance Plan has an advantage over term insurance that since the same bank has given insurance which has lent the loan and the two are linked, the settlement etc in the case of death of loan borrower will be seamless. Else you will have to get claim from one insurer and then pay the outstanding loan amount..
In terms of cost, the quote that I am seeing is actually working in favor of Home Loan insurance.
I agree that banks try to add the insurance premium to the loan amount which means effectively you end up paying double the premium due to interest over the loan tenure..
So my take is to do the following:
1. Take home loan protection insurance which is linked to home loan
2. Try to pay the premium yourself than adding to the home loan amount
3. Go for the yearly premium option instead of one time full payment, so that you have an option to switch your loan to another bank if required in future..
Regards
M
Hi,
I am in similar situation. I have gathered all the documents and have provided to the Bank bank, now I got to know that I have to take the insurance as well. They are asking it to take from there insurance only. They are quoting big premium for 5 years and again after 5 years I have to pay. Also the loan processing will not be moved forward until I take the insurance.
You guys have talked about HLPP. I guess I am also being forced to take this one.
You have also mentioned about the Term Insurance, from where to buy this. Is there any online site to buy that one? What that Term Insurance is called?
Any info would be useful here.
Regards,
Anand
Hi, Thanks for writing the above article it was really helpful .
I have a question thou, I have taken Home Loan from ICICI Bank and they have offered me term Insurance policy of which the Premium amount will be deducted in one go i.e 50000 . This 50k was added in my Loan amount and after disbursement it was deducted as premium for Insurance policy .
This means that i will have to pay extra EMI for this Extra 50k for next 20 years ?? Which will be actually far more than 50k, Now I feel that i made a wrong decision instead i should have taken policy in which Yearly premium is paid and i would have paid same amount in Installments yearly .
Please advise if i have made right decision or wrong decision .
Regards,
Raj .
Hi,
Is there any option that i can pay Premium amount yearly instead of one time,
So that i can save some money paid in EMI’s also i have time to pay premium .
Please suggest …
Regards,
Raj
Sir, I have taken home loan from SBH and I’am going to take Home Insurance Rinn Raksha.
I want to clear, the difference between Term Insurance and SBI Rinn Raksha. So many people tells so many things. I’m confused. Please help me in this regards.