Insuring your property with your home loan lender is not mandatory

"I am taking a home loan from XYZ Bank. They are forcing me to buy property insurance from them claiming it is mandatory as per RBI rules. Is that true and should I buy the property insurance from them or can I explore from the market also?"

These kinds of queries have become very common as banks seek to protect their interests while giving a home loan as well as to earn commissions on the insurance products that they sell. But one thing is very clear. There is no requirement by the Reserve Bank of India (RBI) that any kind of insurance needs to be mandatorily taken at all while taking a home loan from a bank.

The use of the regulators' name is clearly mis-selling. At the same time, there is no prohibition on the banks either to make internal guidelines that home loan consumers have to take certain kinds of insurance (including property insurance) before the loan can be disbursed. But this becomes the particular bank's internal requirements. Most, but not all, banks require you to take a term insurance and property insurance while taking a home loan.

Again, these banks cannot officially insist on buying these policies only through them. They have to allow you to buy similar policies from the open market and assign it to them. The prohibition against compulsory linkage of insurance product to be bought from them to loans being granted by them is not really being followed by them due to the high commissions involved in insurance products.

Before we get into what you can do when faced with this arm-twisting situation from your lending bank let's take a quick look at the type of insurance on offer.

First is a term insurance where the insurance companies pay off the loan to the lender should the borrower die while the loan is still outstanding. This is an excellent insurance to have when taking a home loan. Second is property insurance where the loan amount will be paid off by the general insurance company should anything happen to the property due to natural calamities such as earthquake, flood, etc. Again an excellent insurance for you to have.

Less common is critical illness and accidental disability insurance which pays off the loan to the bank should the borrower suffer from a debilitating disease or a permanent disability due to an accident. Once again this is an excellent insurance for you to have.

Thus, it is in your own interest to take such insurance policies when you take a home loan. What makes it an issue is the fact that you are arm-twisted into buying it through the bank itself without being allowed to buy from the open market as well as the fact that the bank's insurance policies tend to be much more expensive than comparable policies bought from the open market. This is particularly true of the term life insurance policy and the disability policies though the property insurance tends to be competitively priced.

There is a certain convenience attached to buying the linked policy offered by the bank and, if after your research from the open market, you find that the price is only marginally higher you can go ahead and accept the insurance policies from the bank. Otherwise just let the lender know that you will complain to the banking ombudsman about the compulsory linkage of the insurance policy. In most cases, this will make the lender drop his insistence on buying the policy through them only. You can also move your business to another lender as there is stiff competition in the home loan market. If you are already at an advanced stage with the lender and do not have the time to go through these negotiations then you can always buy the policy and return it during the free look period of 15 days. The insurance company will have to return the premium to you after a few deductions. Of course, make sure you are adequately insured before you exercise this option.

To summarise, make sure that you are adequately insured when you take a home loan though you can always work out ways of reducing the insurance cost.