Home Loan Insurance Vs Term Insurance: Which One Is The Most Suitable For You?

The home loan insurance, commonly known as home loan protection plan (HLPP), is a policy that covers the home loan liability in case of the borrower’s death

A term insurance is a pure life insurance product

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Buying a home of one’s own is an aspiration of millions of Indians. The easy availability of home loans from highly regulated entities have brought us much closer to realising this aspiration. However, in the excitement of being a homeowner, it is important to remember that a home loan constitutes a significant liability. This is also time to make sure you have adequate financial protection so that your family isn’t burdened with loan repayments in unforeseen circumstances. One often discussed product that can help is the home loan insurance that lenders often offer along with the loan and the other is the term insurance. 

How do you make an informed choice between the two and identify what is the best choice for you? Read on. 

What Is Home Loan Insurance?

The home loan insurance, commonly known as home loan protection plan (HLPP), is a policy that covers the home loan liability in case of the borrower’s death. It is usually offered as a single premium plan either by lenders themselves or through the lender’s partners at the time of loan approval, and provides the borrower protection against repayment-related risks such as disability or death. One important point to understand is that the beneficiary of an HLPP is the lender and not the borrower or insured, and the insurer will pay the loan outstanding directly to the lender in case of a claim. 

Home loan insurance products can be very expensive compared to a term loan. Also, if they are a single premium policy bundled with your home loan, you would not be able to port your insurance if you ever switch your lender. The tenor of the policy is usually the same as that of the home loan. However, if the tenor of the loan goes up due to a hike in interest rates, the insurance cover may not be able to fully cover the loan. So, the nominee of the borrower may have to shell out extra if the borrower dies.

What Is Term Insurance? 

A term insurance is a pure life insurance product. You select a fixed sum assured; pay monthly, quarterly, or annual premiums; and in case something untoward happens when the policy is in force, your beneficiary will receive the proceeds of the insurance policy. It is in no way tied to your loan, so it does not increase or decrease with the outstanding loan amount or end with your loan. 

Key Differences: Home Loan Insurance Vs Term Insurance 

Feature	Home Loan Insurance	Term Insurance
Coverage	Covers only the home loan	Covers all financial liabilities
Sum Assured	Reduces over time	Fixed throughout the policy term
Beneficiary	Lender	Family members
Premium	High, mostly single-premium	Low, can be paid yearly
Flexibility	Ends with the loan	Can continue even after loan repayment
Additional Benefits	No additional financial security	Covers multiple risks (income loss, other debts)

Why Term Insurance Is A Better Choice For Home Loan Borrowers

The home loan insurance provides additional guarantee that the loan would be covered in case the borrower dies during the loan period. Its coverage is limited to the extent of the outstanding loan. The term policy, on the other hand, typically provides the borrower a cost-effective insurance against all their liabilities including home loan. This leaves their family better equipped to face all financial eventualities. Term plans cost significantly less than single-premium home loan insurance. Moreover, as the premium for the home loan insurance is bundled with your loan, it can inflate your loan amount. The term insurance also offers significant flexibility. It is portable and remains in force even after the loan is repaid, unlike the home loan insurance which tied purely to your loan. You can also opt for additional riders for additional protection. 

Marking The Right Choice

The lender does not need you to take an insurance. The home loan is a secured loan, and the bank has your property as the collateral for the loan. So the insurance is really for your peace of mind that your family would not have to worry about repaying the loan in case something untoward happens. So, choose the alternative that you think gives you maximum protection and coverage.

If you already have term insurance, an additional home loan insurance may be unnecessary, but make sure you have adequate coverage. Remember, you are buying an insurance to safeguard your and your family’s interests. So choose what works best for you. Evaluate your liabilities and decide basis the coverage you need and the premium.

(The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)