Does Home Loan Insurance Pay Off Your Entire Home Loan?

Home loan insurance is often marketed as a safety net for homeowners, but does it truly cover your entire mortgage balance in times of crisis? Many borrowers assume their premiums guarantee 100% protection, only to discover hidden clauses or percentage-based payouts when they need it most.

This article explores the nuances of home loan insurance policies, explores common coverage limits, and explains why understanding the fine print is critical to avoiding financial gaps.

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Will Your Home Loan Insurance Pay Off Your Entire Home Loan?

Home loan insurance provides coverage in the event of unfortunate circumstances such as death, terminal illness, or accidental disability.

• In case of death or terminal illness: The plan will pay 100% of the sum assured as per the cover schedule, which could potentially cover the entire outstanding loan amount, depending on the chosen sum assured.
• In case of accidental death: If the insured member dies due to an accident, the plan pays 200% of the sum assured, further increasing the coverage to help pay off the loan.

The coverage is subject to the sum assured selected under the plan, which may not always cover the entire loan if the sum assured is lower than the outstanding loan amount. The policy also terminates once the claim is paid.

Home Loan Insurance Coverage In Case of Death Due to Suicide

If death occurs due to suicide within 12 months from the date the risk coverage starts (either from the commencement of the policy or its revival), the nominee or beneficiary of the insured member will be entitled to the higher of:

• 80% of the total premiums paid until the date of death, or
• The unexpired premium value available at the time of death, provided the policy is still in force.

Note: The term “Total Premiums Paid” refers to all premiums paid under the base product, excluding any extra premiums and taxes (if collected).

Suggested Read: Home Loan Insurance Tax Benefits

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How Does Home Loan Insurance Coverage Work?

Home loan insurance (or mortgage protection insurance) coverage in India works on a decreasing term basis. Here’s a detailed breakdown:

1. Reducing Cover Option

• The sum assured decreases gradually over the policy term in alignment with the reducing loan balance.
• As the loan principal is repaid, the insurance coverage reduces accordingly, ensuring that the insurance payout correlates with the outstanding loan amount.

2. Level Cover Option

• The sum assured is fixed at the inception of the policy and remains constant throughout the term.
• This option provides consistent coverage, regardless of the remaining loan amount, meaning the same sum assured is paid out if an insured event occurs.

3. Moratorium Option

• Available for members who have opted for a moratorium period during the repayment of their loan.
• Cover during moratorium period:
  • If interest is paid by the insured, the cover remains level until the end of the moratorium period and reduces thereafter.
  • If interest is accrued, the cover increases monthly during the moratorium period and then reduces once the moratorium ends.

4. Joint Life Coverage

• Applicable when more than one person is involved in the loan (e.g., co-borrowers).
• Both individuals are covered under a single policy, with the sum assured paid out upon the death of any one life.
• The policy will terminate for the surviving borrower after a claim is made.

5. Co-borrower Coverage

• Covers up to five co-borrowers, with each person individually underwritten and issued a separate certificate of insurance.
• Coverage is proportional to each co-borrower’s share of the loan.
• In case of a claim, the coverage will terminate for the deceased co-borrower, and the surviving borrowers will continue their coverage in proportion to their share of the loan.

6. Flexibility in Cover Term and Amount

• Cover Amount: The insured can opt for a cover amount up to 120% of the loan amount, providing additional financial protection.
• Cover Term: The insured can choose a cover term of up to 40 years, but it cannot exceed the actual loan tenure.

Suggested Read: Home Loan Insurance Status After Home Loan Closure

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Modes of Paying Home Loan Insurance Premium

Home loan insurance premium can typically be paid in the following modes:

Payment Mode	Description	Benefits
Yearly Premium	Premium paid once per year	Most cost-effective, single payment for the year
Half-Yearly Premium	Premium paid every six months	Offers flexibility with slightly higher costs compared to yearly mode
Monthly Premium	Premium paid on a monthly basis	Flexible, smaller payments suited to a monthly income cycle

Suggested Read: Home Loan Insurance vs. LIC Term Insurance

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Benefit Payout Options: Choose What Works Best for You

When an insured event occurs, the policy amount will first be used to settle any outstanding loan. Any remaining benefit will be paid out to the nominee or insured member through one of the following options:

1. Lump Sum: The remaining amount will be paid in one lump sum.
2. Monthly Income: The excess benefit will be paid in monthly installments over 2 to 10 years (24 to 120 months). The first payment will start one month after the insured event.

You must choose the Benefit Payout Option at the time the policy is taken. This option cannot be changed later. If the policy covers more than one person (e.g., joint life or co-borrowers), any extra benefit will be paid as a lump sum.

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What Happens If You Decide to Discontinue Your Home Loan Insurance?

If you decide to discontinue the cover, the company will pay an unexpired premium value based on the following:

For Single Pay Policies:

The unexpired premium value will be calculated using the formula below:

Unexpired Premium Value = (X% of Total Premiums Paid) * (Months Remaining to Maturity) * (SA at the time of Termination) / (Total Months in Term)

Example:

• Total premiums paid: Rs. 50,000
• X% (based on the termination point after 4 years): 50%
• Months remaining to maturity: 6 years (72 months)
• SA at the time of termination: Rs. 1,00,000
• Total months in the term: 120 months

Calculation: Unexpired Premium Value = 50% * 72 months * Rs. 1,00,000 / 120 months

Unexpired Premium Value = Rs. 30,000

(So, if you decide to terminate your policy after 4 years, the company would pay you Rs. 30,000 as the unexpired premium value.)

For Limited 5 Pay Policies:

Similarly, for limited pay policies, the formula is:

Unexpired Premium Value = (Y% of Total Premiums Paid) * (Months Remaining to Maturity) * (SA at the time of Termination) / (Total Months in Term)

Example:

• Total premiums paid: Rs. 30,000 (Rs. 10,000 each year for 3 years)
• Y% (based on the termination point after 3 years): 30%
• Months remaining to maturity: 7 years (84 months)
• SA at the time of termination: Rs. 2,00,000
• Total months in the term: 120 months

Calculation: Unexpired Premium Value = 30% * 84 months * Rs. 2,00,000 / 120 months

So, if you decide to terminate your policy after 3 years, the company would pay you Rs. 42,000 as the unexpired premium value.

Suggested Read: Is Home Loan Insurance Mandatory?

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Conclusion

In conclusion, home loan insurance can offer valuable protection, but it’s essential to understand its terms and conditions to ensure it fully covers your mortgage in times of crisis. While some policies provide full coverage in the event of death or terminal illness, others may have limitations or clauses that reduce the payout.

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Frequently Asked Questions