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Understanding Insurance Requirements for Home Loans in India: What's Mandatory and What's Optional?

Posted on 15 May 2024
Author: Sayan Sircar

Tags: House Purchase ; Loans ; Insurance

4 mins read
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This article provides a clear guide to navigating the insurance requirements when securing a home loan, helping you make informed decisions.

Understanding Insurance Requirements for Home Loans in India: What's Mandatory and What's Optional?

📚 Topics covered:

What are the Risks of a Home Loan?
Can the Bank Make These Insurance Policies Mandatory?
How to Cover the Risk of Property Damage?
How to Cover the Risk of Death of the Borrower?

What are the Risks of a Home Loan?

A home loan carries several risks starting from the moment you borrow money:

What happens if you lose your job or become too ill to work?
What if your house is destroyed by fire or damaged in an earthquake?
What if you die and there isn’t enough money to cover the home loan?
What if interest rates rise and you can’t afford the monthly payments?
What if having a monthly home loan payment stops you from taking career risks like changing jobs or joining a startup?

To mitigate some of these risks, there are insurance policies:

Property Insurance: Covers damage to your house from events like fire or earthquakes.
Loan Insurance: Covers your loan payments if you die.

For other risks, please check these resources:

Career risks: How does your risk profile change with a home loan?
Loss of income due to disability: What is Personal Accident Insurance: Who needs it and why?
Rising interest rates affecting affordability: What to do when your home loan interest rates rise?

Can the Bank Make These Insurance Policies Mandatory?

“We will not give you a home loan if you do not take loan insurance or property insurance.” - the bank cannot enforce this.

As per the April 2022 RBI Master Circular on Housing Finance, banks cannot compel you to buy loan or property insurance. However, it is wise to have both, as long as they are not purchased through the lending bank.

To understand which insurance policies to buy when you take a home loan:

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Which funds should I invest in?

How to Cover the Risk of Property Damage?

Typically, a Home Insurance plan covers the house structure and, optionally, its contents. This insurance is very affordable: around ₹200/month for a 10-year policy that covers a ₹1 crore house.

What you should do:

Buy the “Bharat Griha Raksha Policy” or a similar product from general insurers.
Pledge the policy to your lending bank so they receive any payouts directly if necessary.
Opt for the standard 10-year cover unless your home loan term is shorter.

What you should not do:

Buy a policy from the lending bank to avoid issues if you switch banks.
Add the insurance premium to your loan, as this incurs interest.
Opt for monthly premiums, which could lapse if payments are missed.

How to Cover the Risk of Death of the Borrower?

A term insurance policy is suitable since it covers the risk of the borrower’s death. If the borrower dies, the insurance payment (check calculations here) can settle the outstanding loan.

Check out our guide: Term life insurance: What, why, how much to get, and from where?

A 15-year term insurance plan for ₹1 crore costs between ₹15,000 and ₹30,000 per year, depending on the borrower’s age, health, and job type. You should also purchase a similar amount in personal accident insurance since it covers the disability risk as well.

What you should do:

Purchase a policy that covers the loan amount for the exact loan period.
If there are multiple borrowers, like a couple, each should be insured for at least half the loan amount.
Choose an annual premium plan that lasts until the home loan is paid off.

What you should not do:

Accelerate your premium payments.
Extend the policy beyond age 60.
Insure a non-earning member for the loan amount.

There is an exception to this rule. Servicemen i.e. those working for military or para-military forces may be denied additional term insurance due to the nature of their work. For them, the bank-provided loan insurance is the right product to take.

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