Home Loan Insurance: Who repays home loan if borrower dies?

Home Loan Insurance: Purchasing a home is a dream for many middle-class Indians. It's an expensive dream to achieve, which is often fulfilled with a big home loan stretching for many years. Since these loans are high in amount and last up to 30 years, the lender does background checks regarding the monthly income and the loan repayment capacity of the borrower.

The lender expects the borrower to repay the equated monthly installment (EMI) on time.

But no one has witnessed anything unforeseen.

There is a possibility that the borrower who has taken the home loan may die midway through repayment.

Have you ever thought about what happens when a borrower dies without repaying their home loan?

Does the lender have any provisions to recover the loan?

Or the home loan chapter closes with the death of the borrower.

The action that a borrower can take in such an unwanted situation is mentioned in the home loan agreement.

However, through the legal route, the lender has two options to recover its loan.

It can either force the lender's family to repay the loan or it can sell the property against which the borrower took the home loan.

But what if the family is not in a financially sound condition to repay the loan, or if it doesn't want to lose property as it is staying in it?

Amid such a backdrop comes the importance of home loan insurance.

Santosh Joseph, founder of Refolio Investments, said, "When one has a home loan that is determined based on their income and they’re paying for it, which is therefore completely fixed upon the person's income or even joint income and their ability to pay, one would like to mitigate that risk from their home ownership, and therefore one considers home loan insurance so that, if in an unfortunate event that the person paying the home loan isn't there, the home is still secured from the insurance that will take care of the EMI outstanding."

What is home loan insurance?

Home loan insurance, also known as the Home Loan Protection Plan (HLPP), is an insurance policy that helps the family repay the home loan if the borrower dies midway through repaying the loan. 

Types of home loan insurance

Level Cover Plan

In this type of cover, the amount of coverage remains the same throughout the loan tenure.

Hybrid Cover Plan

In a hybrid cover plan, the coverage remains the same for the first year, but it keeps decreasing from the second year onwards in accordance with a decrease in the home loan outstanding balance.     

Reducing Cover Plan

The coverage reduces along with the outstanding home loan insurance. 

Can a home loan be covered under any other insurance policy?

While an HLPP is specifically designed for home insurance cover, the same can also be covered under a term insurance policy.

While taking a term insurance policy, the insurer can also cover home insurance by paying extra premiums.

Is there any difference between an HLPP and a term insurance policy?

Though they can cover home loans, there are fundamental differences between the two.

In term insurance, the insurance cover remains unchanged, while in an HLPP, the sum insured reduces in proportion to the home loan repaid.In term insurance, it's the deceased's family that gets the money, which it can use to repay any loan, including home loans, while in an HLPP, the lender gets the money from the insurance company.

In term insurance, one pays the premium on a monthly basis, while in an HLPP, one pays a one-time premium.

A term insurance works as a financial aid for the family, and the sum insured one gets after the policyholder's death can also be used in many other ways apart from repaying the home loan.

Do an HLPP and term insurance cover health-related challenges too?

The advantage of buying an HLPP add-ons is that they also cover physical disabilities, terminal illnesses, fire accidents, and man-made hazards.

However, these days, with extra premiums, you can also cover these health conditions in a term policy.   

Do an HLPP and term insurance also cover joblessness?

HLPP add-ons offer cover for EMI payments for up to 6 months if you have received a pink slip from your employer.

Such cover ensures that you don't face penalties from the lender for missing EMIs.

From the lender's point of view, home loan insurance works as a risk mitigation factor as it ensures their debt doesn't turn into a bad one.

Should one opt for an HLPP or term insurance?

Adhil Shetty, CEO, BankBazaar.com, says that term insurance provides your family with protection against a wide variety of risks.

"A home protection plan is for a limited period. Its sole job is to pay your home loan in case of your death. It’s typically offered with a single premium bundled into your home loan, which is not ideal since your premium payments also attract interest along with the loan. The plan expires after the repayment of the loan. If the loan is foreclosed, there’s no benefit. You may also find it difficult to claim a refund after the foreclosure."

He adds, "A term plan is more versatile. It can continue even if the loan is foreclosed. It could protect your family against a wide variety of risks including but not limited to your home loan payment after your death. Just ensure you have enough coverage to protect your family against all known risks and your coverage isn’t exhausted by the loan payment alone." 

Joseph, on the other hand, says that an HLPP and a term insurance have their own importance and one should opt for both for a variety of reasons.

"Having two separate covers, that is, have a term cover for you, to benefit your family, and have a term cover specific to the need of the home loan," says Joseph.

"However, one could argue that, why can't we take a large cover which will even include the home loan. It's true, but having a home loan cover specifically for home loan reduces the stress, the worry and the risk. Hence, I would go with keeping these two separate, getting a sufficient cover for yourself and getting a sufficient cover for the outstanding requirements of your home loan liability," Joseph further adds.

Since home loans are high amount, the sudden demise of a borrower can add financial burden on the family.

Hence, it is very necessary to have home loan insurance to give mental peace and financial cover to your family.

An HLPP and a term insurance are two options to gettting your home loan covered.

Both have their pros and cons.

One can do their due dillgence to pick one or both of them.

But the bottom line is to get your home loan insured.