I have taken up a home loan of Rs. 50 Lakhs for my new home. In case something happens to me, what happens to the loan? What can I do to safeguard my home loan repayment in case something happens to me?
Good to see that you are looking at a future picture including possibility of an unfortunate circumstance. A lot of people live under the impression that in case the home loan borrower expires while the home loan tenure period is ongoing, the loan gets waived off by the bank.
As per the RBI guidelines, if case a borrower dies the obligation to repay the home loan gets transferred to the co-applicant or legal heirs as per the case. So basically in case a home loan borrower dies prematurely, the co-applicant or family would need to repay the loan. In case they are unable to repay the loan, the bank can sell the house to recover their dues.
A good way to avoid such a situation is to insure your home loan. Home loan insurance is a boon for families with only one active earning member. Home loan borrowers can choose from a home protection plan. The premium will be added to your loan and will be taken from you as nominal installments along with your home loan EMI. The home insurance company repays balance amount of the home loan in case the borrower dies or is permanently disabled.
You can look at a Home Loan Insurance policy. A Home Loan needs to be paid off to the lender in the form of Equated Monthly Instalments (EMI) over the tenure of the loan. This liability needs to be repaid to the lender, irrespective of whether the borrower is alive or not. In case of the untimely death of a borrower during the term of the loan, their family members will need to repay the loan. Home Loan Insurance ensures that the insurance company pays off the outstanding loan amount in the eventuality of the death of the borrower, thus protecting the family members from the burden of repaying the Home Loan.
The working of a Home Loan Insurance is similar to a Term Life Insurance policy. The differentiating factor between the two insurance policies is that in the case of a Home Loan insurance, the sum assured is not a fixed sum, but will be equal to the outstanding Home Loan amount. In other words, the insurance cover available under a Home Loan Insurance policy keeps reducing with the payment of EMIs, which reduces the outstanding loan amount. In some cases (for example, the Home Safe Plus scheme of ICICI Bank), the cover available is on a flat basis instead of a reducing basis. In this case, a fixed amount is paid out to the beneficiary irrespective of the outstanding loan amount.
Home Loan insurance eligibility criteria differs from one company to another. The minimum entry age is 18 years. The maximum age of the borrower while availing the Home Loan insurance is usually 50 years for most banks, but some banks extend this to up to 60 years. Some banks also stipulate the maximum age of the borrower on the expiry of the policy.
The amount of premium depends on:
Age of the borrower- Premium increases with age of the borrower. Usually, insurance companies insist on medical tests beyond 40 years. Below this, a simple declaration is sufficient.
Amount and tenure of the Home Loan- Premium increases with the duration of the loan and amount. Even for the same insurance cover, a higher term will result in a higher premium.
Borrower’s medical record- If the borrower is in good health, premium will be at regular rates. For example, if you have had a heart attack in the past, the premium you will need to pay will be higher than a borrower with no past incidents.
Insurance companies generally insist on a one-time payment of the premium. However, in most cases where insurance is taken from the company with which the Home Loan lender has a tie-up, the premium amount is bundled with the loan and included in the EMI amount. For example, if the Home Loan is for Rs. 20 lakhs and the insurance premium is for Rs. 2 lakhs, the lender pays the entire premium amount to the insurance company upfront. The new loan amount will now be Rs. 22 lakhs, which will be spread out as EMIs over the tenure. So in effect, you will be paying interest on the Rs.2 lakhs premium amount also.
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