Is it mandatory to buy a life insurance policy with a home loan?

Owning a home is a dream that every Indian cherishes. It is a way to show yourself that you made it—a sign of success. While a wealthy few can afford to buy a house outright, most salaried professionals have to rely on home loan services offered by banks. With a home loan, you can put down a small down payment on the property and pay the rest off in equal monthly instalments or EMIs. The loan service provider charges a certain amount of interest against the significant sum proffered to you as a loan.

While there are many benefits of owning your home, you cannot deny that you have signed up for a long-term liability. Your home loan payment is an amount that you will have to set aside every month for the next few decades.

In the future, you might have the funds required to repay the loan in full, so you have your house in the clear. However, for most people, putting together a large sum of money purely out of savings is not a realistic possibility. Since you are stuck with home loan EMIs, it is important to factor them into your financial planning. What are your contingency plans in case you lose your job or something worse happens?

Do you need a life insurance policy to cover a home loan?

Till your home loan is paid off, it is a liability that you carry on your shoulders. In the unfortunate event of your untimely death, your grieving family should not be buried under the financial responsibilities you signed up for. With this in mind, it is recommended that new homeowners should get a life insurance cover along with their home loan.

There are many different types of life insurance policies. Many of these may already be a part of your financial portfolio. To secure your family's financial future when you are not around, a term life insurance plan is a recommended financial product. A term life insurance plan covers your life in exchange for affordable premiums. It is a smart product that can help cover all of your financial liabilities in case of your untimely demise, so none of the burdens fall on your family.

Is it compulsory to purchase property insurance or home loan protection plans?

The short answer is no. It is a financially-sound idea, but not a mandatory one. Neither the RBI (Reserve Bank of India) nor the IRDAI (Insurance Regulatory and Development Authority of India) has made it compulsory to purchase property insurance, home loan protection plans, or any other type of life insurance plan while getting a home loan.

Bolstering your financial portfolio with a term life insurance plan linked to your home loan offers you extra security and peace of mind, but it is not mandatory. Many home loan customers find themselves in the final stages of loan approval before the bank springs the extra expense of a life insurance plan at them.

By misrepresenting the non-mandatory nature of getting a life insurance policy to cover loan liabilities, some banks create undue pressure on new homeowners. Customers are then stuck between a rock and a hard place—either purchase the added insurance or risk a home loan rejection purely due to this technicality.

Often, the bank makes the process of buying a life insurance policy easy by tacking on the premium amount for a single premium term insurance policy to the existing loan amount. This way, the customer does not have to pay anything out of pocket, and the cost of the life insurance plan causes a negligible spike in the EMI amount.

While there is good sense in purchasing a term life insurance policy linked to your home loan, it is not mandatory, and the customer has the right to choose for themselves.

Is it better to connect an existing term life insurance plan or buy a new one?

With a term plan that pays out a substantial death benefit, you can ensure that your heirs inherit your assets and not your liabilities. In a life insurance plan tied with a home loan, the insurer promises to pay the lender the money owed against the house from the sum assured to you as a death benefit.

For your family, a term life insurance policy could be the difference between living in a debt-free home and dealing with the stress of not paying EMIs and, thereby, losing the house.

If you already have a term life insurance plan, you may wonder if paying for another term plan connected to your home loan is worth it. Wouldn't it cost you lesser to join an existing term life insurance coverage with your home loan?

Consider why you purchased your current term insurance in the first place. The lump-sum death benefit paid by a regular term life insurance plan can be used to make up for the loss of wages and a steady stream of income in your absence, pay for day-to-day financial obligations, and fund bigger dreams such as your child's higher education. All of these reasons remain true.

With a home loan, you now have an additional liability and a substantial one at that. Diverting your existing term plan to pay for your home loan liability is a stop-gap arrangement. A term life insurance policy specifically chosen to cover home loan liabilities gives you the peace of mind of knowing that your family need never worry about a foreclosure or loss of home due to defaulting on EMIs.

Final thoughts

Financial decisions should not be taken lightly. Do the math by factoring in your home loan amount, term life insurance plan premiums, and existing life cover.

• Remember that even if you choose to buy a term life insurance plan or property insurance, you do not need to buy it from the bank disbursing your home loan. Ask your bank to give you a quote for an insurance policy to understand how your liability towards the bank changes. Get quotes from other insurance providers, compare, and make an informed choice.
• If you were to port your loan to another bank later, you need to get a term life insurance plan that is not tied to the existing lender.
• If you are being pressured into buying a "mandatory" policy from the bank, ask to see a valid document that announces this purchase's compulsory nature. Let the bank know that you are aware that you are not legally bound to purchase any life insurance product with a home loan from the same bank.
• Lastly, consider your existing life insurance plan coverage. Is the sum assured substantial enough to pay for your home loan as well as your family's expenses in your absence? If it looks like a tight fit, bulk up your financial portfolio with a solid term life insurance policy earmarked to pay off liabilities.