Buying a dream home is something which all of us desire. However, not many of us are lucky enough to have money to buy the home on a down payment and hence need a home loan. Taking a home loan is a tedious process where the lender checks your eligibility and then the credit history. All this takes time and when finally the approval comes, you are already tired. The papers you need to sign to get the loan are a whole bunch and it is a common practice to sign all papers without going through the details mentioned in the paper. One of the papers along with home loan documents is its insurance. Lets discuss what should be your approach while dealing with the home loan insurance.
Why home loan insurance
Buying a home on a loan entails a liability of paying back the loan. In case of your unfortunate death during the pay term, you would not want your family to become homeless. A home loan insurance insures that the insurance company pays for the balance amount, should something happen, to you.
How does it work
Suppose you take a home loan insurance policy for Rs 25 lakh and in the next 5 years you pay about Rs 5 lakhs. Unfortunately, if something happens to you and your family is unable to repay rest of the 20 lakhs outstanding then the home loan lender is in full right to sell off your house and recover rest of the amount. However, if you have a home loan insurance policy, it will take care of your balance amount of Rs 20 lakhs that you need to repay. You can choose the coverage of a home insurance policy between a reducing balance or on a flat basis.
Choosing home loan insurer
It is not mandatory to take home loan insurance from the lender. However, many lenders get into a tie up with an insurance company and involve in an arm-twisting techniques to pressurise a borrower into taking a home loan insurance policy from them. Many banks like ICICI bank, SBI, HDFC bank etc have floated their life insurance companies. When you apply for a home loan to a bank branch the bank executives may try to push you to buy a home loan insurance policy from them saying that your application may get delayed or rejected if you do not take a home insurance policy from them. Always remember that “insurance is a matter of solicitation” and no company can force you to buy an insurance policy from one particular company.
Cost of the policy
The premium of a home insurance policy depends upon several factors including your age, the amount of home loan you seek, and the number of years you would take to repay the loan.
You have the option of choosing a single premium policy or the premium can be spread over few years. Some lenders include the premium payment with the EMI of the home loan. You must be very careful when the lenders increase your home loan eligibility and deduct the extra amount towards payment of premium of the home loan insurance policy.
Ram Dutt Tripathi, a Lucknow based journalist, learnt it the hard way when he approached State Bank of India for a home loan. State Bank of India is a corporate agent of SBI Life. Tripathi alleges, “I had applied for a home loan to State Bank. They issued me a home loan insurance policy from SBI Life. I later came to know that similar policy was available to me for less than half the amount from SBI life itself. After my repeated complaints the bank has refunded only Rs 3,79,638 without giving any explanation about deducting Rs 57,465. Despite my repeated emails the bank is not providing details of deductions.”
Tripathi warns home loan seekers to read all documents very carefully before signing them. He advises to go through the initial pain of doing some research on home loan insurance policies than regretting later, as getting the money back in cases of mis-selling is very difficult.
Compare with other policies
It is important to compare the premiums of various home loan insurance policies available in the market and take a decision based on it. Sales agents of various financial institutions are under pressure of meeting their targets. Add to it, the attractive incentives provided by the companies on selling insurance policies sometimes lead to hard selling or even mis-selling of policies by the agents. So, howsoever big the brand may be, it is up to you to protect yourself from the hard selling techniques of a particular bank/insurance company and to be cautious and evaluate all options before taking a home loan insurance policy.
In case of a rejection or inordinate delay in the home loan because you did not take a policy of their choice, you can complain against the lender to the Reserve Bank of India (RBI) and against the insurer to Insurance Regulatory and Development Authority (IRDA).
Insurance experts say that there have been numerous instances of arm-twisting and mis-selling in the insurance sector which have been reported to IRDA and that much needs to be done to better regulate the sector. Probably some strict action and stricter guidelines are awaited to rein in the mis-selling but till then you must become smart enough not to be fooled into a policy you would never want to buy.