The loan gets transferred to either the co-applicant or legal heirs. So get insurance on the loan, and protect your family from repayment problems.
If you’ve been shopping for a home loan, lately, you’d have noticed that banks are adding insurance to the home loan to offer a ‘package’.
For example, recently, State Bank of India provided a free personal accident insurance cover with the policy. Another bank offered a life insurance cover equivalent to the home loan amount. But not all financers offer such insurance. This lack of cover leaves open the prospect of missing EMIs should the borrower pass away, or become disabled during the tenure of the loan. A home loan cover helps take you through this phase.
DNA Money has the questions and answers on the issue:
What if I am disabled and cannot service the loan?
In such a case, if the family is not in a position to arrange for equated monthly installment (EMI) payments, the same should be communicated to the bank. As a special case, the bank may be willing to restructure the loan. Some banks, while offering the loan, mention in the loan document that an EMI holiday may be provided in special circumstances.
You can request the bank to either postpone the EMI by a specific period of time, or restructure the loan. This restructuring can be done by reducing the EMI amount paid per month so that the tenure of the loan increases. But this would depend on whether the bank approves an EMI holiday or restructuring the loan.
Will my family have to pay after me? Many people are under the misconception that if the home loan borrower dies, then the relationship with the bank is over. This is not the case. If the borrower dies, the home loan gets transferred to either the co-applicant or to the legal heirs. The pending home loan dues would have to be cleared by the existing family members despite of the loss of income that the family suffers. If not, the bank has the right to sell the property and recover its money.
When can the bank sell the house?
The bank would try to avoid selling a property immediately and would give the family an option to repay the loan. “A banker is not interested in selling a property. The family would be staying and so no one would want to buy that property. The bank would ensure recovery of money,” said an expert.
In case the EMIs are not repaid, the bank will first call up the family at the contact numbers it has. This would be followed by a notice sent to the address registered with them. Only after a few follow-ups — which have elicited no response — would the bank decide on whether to take possession of the property.
What happens to the guarantor? In case the family doesn’t pay the loan, the bank may pull up the guarantor, who is supposed to pay the loan incase the borrower defaults. To ensure that there is no difficulty and harassment to your family members and guarantors, consider an insurance cover that will assist in making the payment. If there are insurance covers of the loan equivalent amount, where payment is not linked to death of borrower, then some home financers also offer a discount on the home loan interest rate.
What insurance covers are available? Various types of policies are available. Most insurers offer home loan insurance cover, wherein if the borrower dies, the insurance company pays the home financer the pending loan amount. Other policies provide not just a death cover for the borrower, but also for the damage to home and its appliances in case of any accident in the home. Some policies also consider disability or illness of the home loan taker and pay money toward home loan repayment in such cases. Of course, the more the covers you prefer, the higher will be the premium.
But if you are looking for a simple solution and a lower premium, traditional life insurance policies fit the bill. These are policies that pay a pre-determined amount to the family members post death of the borrower. Ensure that the sum assured is the same as that of the home loan amount. So, if you have a home loan for Rs 45 lakh, then the term insurance policy should have a sum-assured for Rs 45 lakh.
Which is a better option? A term life insurance policy is suggested by many experts as the premium is lower than other polices that offer protection against outstanding payment after the death of the borrower. More so, term insurance cover is available for a tenure of up to 25-30 years, while policies offering disability and life protection for home loan may have a restricted tenure of five years. In addition, in case of a borrower’s death under a home loan insurance policy, the insurer would pay the pending amount directly to the bank.
But in case of a life insurance policy, the family of the borrower would get the entire Rs 45 lakh, as quoted in the above example, irrespective of the portion of loan that has been repaid over years. The family can then use this Rs 45 lakh to pay the home loan outstanding as well as take care of other needs.
What if your bank has an in-built cover? If your home financer is providing you a free insurance cover, than make sure the policy documents are safe in your custody. Borrowers have complained that though the bank promised a cover, it applied for the insurance long after the loan was sanctioned, leaving the initial months of their loan uninsured. The start of the insurance cover is essential as sometimes an insurance policy may not cover the events happening during the initial policy days.
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