Should you buy insurance from a home loan provider?

Understanding why home loan insurance sold by banks may cost more, offer less flexibility

- Sashind Ningthoukhongjam

When Raju went to his bank for a home loan, they offered him a loan insurance. The banker's pitch was simple: If something happens to you, the insurer will take care of your loan repayments, and your family wouldn't have to deal with loan burdens.

Here's how the bank manager put it: Pay a one-time upfront premium that will insure the loan for the entire tenure. If you feel the amount is large, do not worry. We will pay the insurance premium and the balance will be added as an additional loan. Borrowers are also given the option of a periodic premium, but if they fail to pay it on time, there is a risk that the policy can lapse.

To sweeten the deal, it also offered a discount of 5 basis points on the home loan interest rate if the customer opted for the insurance. But experts warn borrowers not to fall for this pitch.

Vinay Uppin, co-founder of EMIS-aver.com, says banks have an incentive to push for such loan covers under bancassurance, where banks charge additional fees for cross-selling products. Such policies are expensive and less flexible than simple term life insurance.

The better option

Uppin said borrowers should simply assign their term plan to the lender. Under Section 39 of the Insurance Act 1938, one can assign a policy to the lender, saying that if anything happens to the borrower, the bank (to whom it was assigned) will first get the insurance payout to cover the loan dues, and then the remaining amount will be given to the family. A pure term involves paying a regular premium in exchange for a lump sum amount in the event of the holder's death.