My bank is asking me to take insurance for home loan. What is this insurance?
Home Loan insurance is similar to other insurance plans which provide a risk cover against a premium. The risk covered in this case is the Home Loan’s outstanding liability in case of unforeseen circumstances like death or disability.
To put it simply, in case something happens to you, the insurance company will pay the outstanding (remaining) loan amount in full and your family will live a burden-free life.
This policy works on the “reducing cover concept”. As the loan amount diminishes, the insurance coverage amount also keeps diminishing. For example, let us assume that you have a Home Loan amounting to Rs. 20 lakhs and took insurance on your Home Loan. For the first year, the insurance company will cover the whole amount of Rs. 20 lakhs. Let’s say you paid Rs. 2 lakhs in the first year, then in the second year, the insurance company would cover the remaining balance of Rs. 18 lakhs.
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