Home Loan Protection Plans - Home Loan Blog - Tata Capital

Know About Home Loan Protection Plans

Mar 09, 2017

Suppose you have done your research and found your dream home. You have also met all the requirements for getting an approval for a loan. While you are completing the formalities, you come across a mandatory loan protection plan.

Being unprepared to bear this additional cost, you are wary. In such a case, you must understand these protection plans before making a decision.

1. About home loan protection plans

A home loan protection plan is an insurance cover. Under this contract, the insurer agrees to settle any outstanding loan balance in case the borrower passes away during the loan tenure. This provides an assurance that the survivors would be able to continue living in the homes in case of premature demise.

2. Protection plans vs. home insurance

A protection plan is different from home insurance. Property insurance covers risks due to natural calamities, theft, fire, and other such events. In comparison, the house loan protection plan safeguards the interests of the lenders and the borrower's family in case the borrower passes away during the loan tenure. This policy lapses after the loan is fully repaid, or if the borrower passes away, or if the loan is transferred to another lender.

3. Types of protection plans

The protection plans are classified as reducing cover, level cover, and fixed cover.

  • Reducing cover: The insurance cover reduces based on the loan repayment schedule
  • Level cover: The coverage remains constant during the entire loan duration
  • Fixed cover: Coverage is constant for a certain period and then converts to reducing cover for the remaining loan tenure

4. Premiums

Insurers assume the highest risks under the level cover option, which is why the premium on these plans is more compared to the other plans. Most of the home loan protection plans are monthly premium policies. Some insurers offer regular and limited premium plans. Regular premium plans have the same premium payment and policy term. The limited premium plan has a lower payment term and longer policy tenure.

5. Protection plan vs. life insurance

Generally, a protection plan cannot be purchased from the open market based on an individual's personal needs and financial condition. Such covers are offered along with the property loans because protection plans are available only on approved loans. Under these plans, the insurer pays outstanding loan amount to the lenders in case of the demise of the borrowers. Any balance amount after settling the loan amount is payable to the nominees.

Although the protection plans are not mandatory, it is advisable to avail of one. This offers you the assurance that your family will not be turned out of the home in case of your demise and their inability to repay the outstanding housing loan. Additionally, tax benefits under section 80C of the Income Tax Act, 1961 are available on the premium. Moreover, riders like critical illness or disability may be included in the protection plan for additional benefits.