If you are already a home loan borrower, then you already know that most PSU and private lenders have tied up with solo insurance companies and push their life and non-life product to the new borrowers. Lenders target to penetrate at least 40% of the borrower-portfolio with insurance products and some insist on it as ‘mandatory’, especially the fire-insurance.
Though there are doubts whether an insurance product can be pushed through the neck of a borrower, we won’t get into that discussion here. Right now, I would like to explain “what happens to your insurance protection when you switch your home loan to a new borrower or foreclose the loan.”
Ideally, under general insurance product, there are several types of coverages starting from fire, earthquake, flood, terrorism to loss of limb, critical illness, job-loss etc. In current times where nothing lasts forever, many of us would like to opt for at least few of these products while taking a long-term credit like mortgage.
Under life insurance, of course, in the eventuality, the next to kin doesn’t have to lose the house hypothecated and the insurance coverage will take care of the outstanding amount. This is an important tool too, for a high-value borrower, not passing on the liability to family.
There are many players in the market, online portals help you compare the premium amount and choose (though I don’t believe that cheapest is the best product to opt for).
All set till you buy. After that, following are the questions you should have answers to:
1. Who pays for the insurance premium and how?
When it’s a bankassurance, the premium is paid upfront by the lender on your behalf and the amount gets added to the loan principal. The repayment happens via the EMI you pay each month for your home loan, which includes the amortisation amount of the premium added.
2. Do I pay interest on the premium amount too?
Yes, you do. If it’s a 20 year home loan of 50 lacs and 2 lacs of premium added to it, then your final loan amount is 52 lacs and you pay EMI on 52 lacs, which obviously has an interest and a principal component embedded.
3. Do I get an original insurance certificate from the insuring company or the lender gets to keep it?
This is a very good question to be asked to the lender’s representative. In most of the cases, the borrowers do not receive any proper intimation/certificate with T&C from the insuring company, reaching them. This leads to a lot of confusions later on, as the customer can not ‘remember’ what was offered to him and at what condition he has bought it.
4. The fact that I never got to speak with the insurance company’s direct representative & met only the bank employee, where do I go, if I have questions? The home loan manager of the lender seems to be quite unaware of insurance-product!
If you are receiving any communication from the insurance company, which ideally you should, all co-ordinates will be mentioned there. If not, then please do not forget to ask for the same from your lander’s sales manager who sold the product to you.
5. Why was I pushed to buy a fire insurance on my property for 20 years(same as my loan tenure) when I am 100% sure that I will sell the property or definitely foreclose the loan much before that? Was there no option of 3/5 years term?
This should ideally be not done & you may discuss openly if you are not willing to buy an insurance for the entire loan term. Most lenders do not insist & give you options for a tenure which is comfortable to you, subject to a minimum of 1 year. Please correspond in writing with the bank, if they are insisting on something which isn’t as per your need.
6. What will happen to my cover if I partially foreclose my loan and my outstanding principal substantially reduces?
There are generally no changes to the amount insured even if your loan principal reduces mid-term, via part pre-closure.
7. What will happen to my insurance coverage if I completely close the loan? Will the cover still exist? If yes, then who will be the beneficiary since I no more owe the lender?
Once you foreclose your loan, the lending bank is no more the beneficiary to the home loan insurance. Usually, the borrower would have two options:
(a) You may choose to continue with the insurance, making someone else in the family the beneficiary, OR
(b) Tell the insurance company that you want the ‘surrender value’ of it to be returned to you.
8. What will happen to my insurance policy if I transfer my loan to another lender? Will the insurance get transferred too?
Same like above, the previous lender will no more be the beneficiary and you will still have the choice as (a) or (b).
9. Can I buy the insurance from a third party insurer and make my home loan lender the beneficiary?
Logically, Yes. You should be able to protect your home loan risk by virtue of purchasing an insurance product of your choice and assign it to the lender who gave you the home loan. In this case, however, the premium will have to be bourne by you & it can not get funded additionally by the lender. The positive side is, you will not have to pay the interest on the premium too.
Most of the borrowers do not understand the above as they are always in a hurry to close the home loan matter and pay up the seller/builder soon. But if you are not informed and careful, it may cost you dearly in times of emergency. There are instances when the family of the borrower also does not have the information whether there has been any insurance-purchase and cannot claim it without having document/proof/policy number with them.
Be an informed buyer!
Sukanya Kumar, Founder & Director, RetailLending.com