Is your lender insisting you buy an insurance plan before sanctioning a home loan? Here’s what to do

It is not mandated by any authority like RBI or IRDA to buy a life insurance policy from a bank to get a loan. However, if you buy a life insurance policy equivalent to the loan amount it is beneficial to family members in case of your unfortunate death. The loan amount will be liquidated from the insurance policy claim. However, in this regard, the prospective borrower cannot be forced to buy the insurance policy. A bank cannot refuse a loan without giving a valid reason.

However, it may not be a bad idea to buy a term policy equivalent to the amount of loan you are availing of from the bank. You may have adequate life insurance policies to take care of your family but that cannot be used for liquidating your loan.  In that case, you can buy the Liability Insurance Plan/Mortgage insurance plan recommended by your bank.

In the Liability Insurance Plan/Mortgage insurance plan, as the loan outstanding amount keeps decreasing over time, the insurance coverage too falls and so is the premium payable by you. For example, if you have taken a loan of Rs 90 lakh, and if the loan outstanding after 10 years is Rs 40 lakh, the coverage in the Liability insurance plan will also be equal to Rs 40 lakh. These types of plans suit those who are already adequately insured via a term insurance plan. Moreover, in such a plan, if you prepay the loan, the coverage also ends with the closure of the loan and no further premium payable on insurance.

Property protection insurance:

Property protection insurance includes flats, houses, residential and commercial buildings. Since the property purchased through a bank loan is the prime security the bank ensures that the property is fully insured under property protection insurance. The house insurance is required only for the reconstruction value of the structure and it need not cover the cost of the land.  Besides standard policy which normally covers fire and earth quack, one can go for a comprehensive plan that covers a wide range of risks like fire, earth quack, lightning, storm, flood, landslide, vehicle impact, rioting, arson, and bursting of pipes and tanks. The policy can be expanded to cover the burglary and breakage for which additional premium insurance is to be paid.  It is the responsibility of the insured to keep the policy alive by payment of the premium on the due date or before the due date.  For house buildings, flats, and apartments insurance companies are generally ready to cover insurance for a longer period say for 15 years and the premium payable for a longer period of insurance is cheaper compared to policies where the annual premium is paid.

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