Is it compulsory to take home loan protector insurance with a home loan?
Few banks and NBFCs hard sales home loan protector insurance policy along with the home loan. But taking home loan protector insurance is not compulsory with a home loan. In fact, IRDA has issued circular to insurance companies against forceful cross-selling by corporate agents (In this case banks & NBFC). IRDA has clearly said, such cross-sale puts customers at lose. Most large banks do not make home loan protector insurance compulsory. Generally smaller banks and NBFC’s to insist for home loan protector insurance for a home loan
Why do bank & NBFC make home loan protector insurance policy compulsory with a home loan?
Today organizations are under tremendous pressure to operate profitably. They get hefty commissions to the sale of such home loan protector insurance for which premium for all loan years is paid in advance. To promote the sale of such home loan protector insurance, banks & NBFCs further gives the payout to channel partners ( Yeap! we too) which is as high as 5%.
This is one of the reasons why home loan protector insurance is costlier than pure term insurance, for which insurance company saves all commission if you buy online from its website
For banks / NBFCs it is sure important to safeguard their money against risk of the untimely death of a borrower. If a borrower is not insured or underinsured, his / her family may have a tough time to repay the home loan. But pure term insurance is far better and economical than home loan protector insurance policy.
Why is home loan protector insurance policy expensive than term insurance?
For a pure term policy, insurance company adopts laid medical procedure to test the health of an insured person. You may have to undergo medical test even for 40-50 Lakhs insurance cover at a young age of 30 years. If you are at good health status, you will be charged low premium. You are eligible for a further lower premium if you are a non-smoker and does not consume alcohol.
On another side, most of the time home loan protector insurance policy gets issued without medical. In most cases, Insurance Company does not gets medical done for an insured amount of 5 Crores at the entry age of 45 years. By opting home loan protector insurance, you are in a group of people of your age who are all untested for the health condition. Because the group is not tested, the risk is high and you share risk mutually, which is the principle of insurance. For home loan protector insurance company charges a high premium because the risk is high.
Disadvantage of home loan protector insurance policy
Though it sounds appealing, because its premium gets financed from the bank and gets issued without under-going medical test it is not a very beneficial product. I have listed a few reasons for your reference
- Bundled product from your bank / financial institution, you do not get a chance to compare other option.
- You can’t take the lowest premium home loan protector insurance policy because your financial institution will not fund its premium.
- It is Far more expensive than a normal term plan
- You cannot transfer loan protector in case of a home loan balance transfer to another lender
- Premium is charged based on outstanding loan amount in normal payment condition
- Part Payments are not taken into consideration
- When you make a part payment, your home loan protection premium does not reduce
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Shall I buy home loan protector Insurance policy?
For me, the first point for not suggesting a loan protector is its cost. It is really very costly compared to a normal term plan. Depending on your age, its premium can range between 4% – 9% of the loan amount. Moreover, as this premium is given to insurance company from your lender. They charge interest on this amount. You pay almost 2.5 times of this premium in 20 years. Some time back while comparing processing fee of HDFC Loan v/s SBI Home loan, I concluded you may have to pay up to 25% longer loan tenure if you choose home loan protector insurance policy. Click here to read article
A term plan is a best and most cost-effective insurance to cover your all your liabilities including home loan. I just calculated the premium of pure term plan for 50 Lakhs for 30 years age male person for 20 years it was only 4605/- yearly. It works out less than 2% of the loan amount. More importantly, you pay the insurance company yearly without any extra interest. Click here to do your calculation
How to avoid hard selling of home loan protector insurance policy from your lender?
First, you must know it is not compulsory by any law to buy home loan protector insurance policy. If your lender is hard selling it, you have all right not to buy. How do you avoid it, depends on your circumstances?
If you have got time to sort this thing, go head-on with your lender. My suggestion to you is, ask them to provide sanction letter, so you have your loan sanctioned at first place. Once you have received sanction letter, ask them to remove insurance telling them it is not compulsory. If they insist it is compulsory, ask them to provide rule which makes it compulsory. Sure they will get back to you removing your insurance condition.
If you are stuck with a deadline and have no time to argue with lender, you can sure get policy returned to the insurance company within 15 days of receiving it. This is because insurance company gives you 15 days free look to understand terms of policy. If you don’t like you can ask them to cancel the policy and refund your money
You can Click here and submit your details for your requirement. We do complete analysis of your requirement & recommends you most economical loan option available from the entire mortgage market.
Feel free to post your experience, comments and ask questions. Your comments can help other home buyers make a better decision.