Home loan

Does your lender require you to take out insurance while taking out a home loan?


While taking a home loan from a bank or any other lending institution, one may also be required to take out an insurance policy. The lender will generally want to ensure that the loan amount is repaid in the event of the borrower’s death before the outstanding loan is repaid. In fact, it is always best to ensure that the loan liability is adequately covered by an insurance plan. However, taking out insurance with the lender is not mandatory.

Banks usually offer a single premium insurance plan equal to the amount of the loan amount. To make the transaction lucrative, some banks may add the premium amount to the loan amount, resulting in a slight increase in the EMI.

Also, there are no requirements to provide proof of insurance to lenders. As a borrower, you are not obliged to take out insurance when taking out a mortgage or personal loan. It is entirely at the discretion of the borrower whether to purchase an insurance policy to cover the loan amount or not.

Ideally, one should have life insurance coverage of at least ten times one’s annual net income. This will help maintain the standard of living for surviving family members. Also, if there are liabilities such as a home loan, additional coverage should be purchased. Once the obligation of the loan has been exceeded, the additional sum insured (life insurance policy) taken out for this purpose can be withdrawn.

Term insurance plans do the trick by taking out a high amount of coverage at an affordable premium. Even loan debts can be covered by purchasing term plans. One is allowed to buy term insurance plans from several companies, however, proper disclosure should be made about it.

It has been observed that a 15 year home loan is usually paid off in 7 or 8 years. Therefore, paying a one-time premium for a term plan may not be very helpful. Instead, purchase additional coverage through a term insurance plan and, being a separate plan, you can stop paying the premium once the loan liability is over. At this point, you can still review life insurance needs and even continue with the plan.

If you already have term insurance, purchase another policy from the same or another insurer with an amount equal to the amount of a home loan. So, if you already have Rs 1 crore term insurance cover and the loan is Rs 40 lakh, get additional cover equal to the loan amount.

Keeping your loan liability covered by an insurance policy is essential, but buying it from the lender is not mandatory. Make sure that on the day you disburse the loan in your name, you have adequate life insurance to cover it.

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