Is it compulsory to take home loan protector insurance with home loan?
Few banks and NBFCs hard sales home loan protector insurance policy along with home loan. But taking home loan protector insurance is not compulsory with 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 home loan
Why do bank & NBFC makes home loan protector insurance policy compulsory with home loan?
Today organizations are under tremendous pressure to operate profitably. They gets hefty commissions to sale such home loan protector insurance for which premium for all loan years is paid in advance. To promote sale of such home loan protector insurance, banks & NBFCs further gives payout to channel partners ( Yeap! we too) which is as high as 5%.
This is one of reason why home loan protector insurance is costlier than pure term insurance, for which insurance company saves all commission if you buys online from it’s website
For banks / NBFCs it is sure important to safe guard their money against risk of untimely death of borrower. If borrower is not insured or under insured, his / her family may have tough time to repay home loan. But a 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 health of insured person. You may have to undergo medical test even for 40-50 Lakhs insurance cover at young age of 30 years. If you are at good health status, you will be charged low premium. You are eligible for further lower premium if you are non-smoker and does not consume alcohol.
On other side most of time home loan protector insurance policy gets issued without medical. In most cases Insurance Company does not gets medical done for insured amount of 5 Crores at 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 health condition. Because group is not tested, risk is high and you shares risk mutually, which is principle of insurance. For home loan protector insurance company charges high premium because risk is high.
Disadvantage of home loan protector insurance policy
Though it sounds appealing, because its premium gets financed from bank and gets issued without under-going medical test it is not very beneficial product. I have listed few reason for your reference
- Bundled product from your bank / financial institution, you does not get chance to compare other option.
- You can’t take lowest premium home loan protector insurance policy because you financial institution will not fund its premium.
- It is Far more expensive than normal term plan
- You cannot transfer loan protector in case of home loan balance transfer to other lender
- Premium is charged based on outstanding loan amount in normal payment condition
- Part Payments are not taken into consideration
- When you makes part payment, your home loan protection premium does not reduces
Shall I buy home loan protector Insurance policy?
For me, 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 loan amount. More over as this premium is given to insurance company from your lender. They charges interest on this amount. You pays almost 2.5 time 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 best and most cost-effective insurance to cover your all your liabilities including home loan. I just calculated premium of pure term plan for 50 Lakhs for 30 year age male person for 20 year it was only 4605/- yearly. It works out less than 2% of loan amount. More importantly you pays 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 to 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 dead-line and have no time to argue with lender, you can sure get policy returned to insurance company with-in 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 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 entire mortgage market.
Feel free to post your experience, comments and ask questions. Your comments can help other home buyer make a better decision.