Planning to buy your dream home is a significant aspiration for countless families, but continuous economic volatility makes it challenging for many. Purchasing a house using your savings is probably not a good choice, as it will deplete your savings, and in case of uncertainty, you may have to borrow funds eventually. In such a scenario, it is probably a better choice to buy via a home loan.
Home loans offer a viable solution, ensuring funds for your dream home without depleting your liquid assets. However, lenders may suggest or require home insurance to safeguard their financial interests. In this article, we’ll explore the dynamics of home loan insurance, its types, and considerations for borrowers.
Is it compulsory?
When applying for a home loan, there is significant confusion regarding whether home insurance is mandatory in India. Therefore, it is crucial to clarify that neither the RBI (Reserve Bank of India) nor the IRDA (Insurance Regulatory and Development Authority of India) has made home insurance compulsory for home loan buyers. Based on this notion, any financial institution or bank can insist that borrowers get a home insurance policy for home loans.
Lender’s Perspective on Home Insurance
Some lenders may insist on home insurance to mitigate potential losses due to unforeseen events when obtaining a home loan. While it’s not mandatory, rejection of loans might occur if a borrower declines home insurance. The rationale is clear: in case of property damage, destruction, or the borrower’s demise, the lender may face financial setbacks. The lender’s main intention in asking for insurance is to safeguard the amount lent to the customer in case of uncertainties, such as death. However, purchasing insurance from the lender is not compulsory.
Term Insurance as an Alternative
If you already have term insurance, say 1 crore or Rs 50 lakh, and you are buying a house, which leads to a liability of Rs 40 lakh, it can completely cover your home loan liability in case of uncertainty. However, if the loan amount increases beyond your insurance coverage, then buying home loan insurance is a feasible option.
Still, if a buyer wants to purchase home insurance, they can opt for it to safeguard their family in case of uncertainty. While we often buy items like vehicles and electronic gadgets on loan, we don’t have the option to purchase insurance against those loans. The higher the coverage, the better it will be for the dependents.
Home Loan Insurance Versus Property Insurance
Home insurance, sometimes referred to as property insurance, serves to safeguard your house or property, providing coverage for the building and/or its contents. On the other hand, home loan insurance primarily covers your loan.
Home loan insurance is a protective measure acquired to cover the home loan amount. In this context, the role of home loan insurance comes into play in the event of the borrower’s demise or if the home experiences damage or destruction.
In contrast, property insurance can be procured to shield the home and/or its contents, depending on the specific insurance policy chosen. Under such a comprehensive plan, there is no coverage for the home loan; instead, it focuses on safeguarding the existing property against natural calamities, theft, and other unforeseen events.
Tax Benefits
Home insurance, like other general insurance, offers tax benefits under the Income Tax Act of 1961. The policyholder can enjoy tax deductions of up to Rs 1.5 lakhs under Section 80C of the Income Tax Act of 1961 for paying the premium of home insurance.
However, if you include the home insurance premium in the home loan amount, i.e., single-premium home loan insurance, there is no tax benefit. Tax benefits can only be availed when you purchase a separate home insurance plan.
Conclusion:
Buying insurance is a good idea as it will safeguard the dependents in case of the borrower’s death. Keeping your loan liability covered with an insurance policy is essential but buying it from the lender is not mandatory. Ensure that on the day the loan is disbursed in your name, you have adequate life insurance to cover it.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
