Taking a housing loan: Should one opt for home loan insurance?

Thirty-two-year-old Abhinav Sinha has just got married and is thinking of taking a home loan for a two-bedroom house. The tenure of the loan will be 20 years and Sinha will be paying the EMIs from his income. Though his wife is also a working professional, Sinha is worried that if he were to meet with an eventuality, his wife would be saddled with the responsibility of paying the debt. Should he consider taking a home loan insurance?

It is likely that Sinha's home loan company proposes an insurance to cover his loan liability. It is a good idea to take such a policy since it reduces the risk for the family. Though Sinha's wife also works, paying a huge, long-term debt may throw her finances in a disarray, especially when he is not around. The last thing he would want is for the lender to foreclose the house.

Home loan insurance is generally offered for the tenure of the loan. It covers the amount owed to the lender at the time of the borrower's death. In effect, the cover keeps reducing with the payment of the EMIs, which cuts the outstanding loan amount. The premium broadly depends on the age and medical history of the borrower, the loan amount, and its tenure. The premium is typically a one-time payment. Sinha gets an option to pay the amount with his own finances or let the lender pay it on his behalf. In case he goes for the second option, his EMI will rise to the extent of the premium paid.

Owning a house is a common goal and a home loan helps people reach it. However, it requires a longterm commitment and, therefore, exposes the borrower's family to financial risks. This liability needs to be repaid to the lender, whether the borrower is alive or not.

A home loan insurance plan helps mitigate the risks for Sinha as it will ensure that the insurance company pays the outstanding loan amount in case he is no longer there. It will protect his family from any additional financial burden.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)