Should You Buy Home Loan Protection Plan

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I was having a discussion about whether to buy a Home Loan Protection Plan (HLPP) when someone has taken a home loan. The idea of HLPP is very noble, since any person taking a home loan would like to ensure that in the unfortunate event of his/her death, the family can continue living in the house. The HLPP ensures that in case of death of the home loan borrower, the insurance company will pay back the remaining outstanding loan amount to the bank.

What is HLPP and why it is needed?
It is well known that buying a house is the most important financial decision taken during one’s life. I would rather defer the buying of a house to mid-40s but at any stage of your life if you decide to take the plunge of buying a house, typically by availing a home loan, you need to worry about HLPP.  If the house is bought through home-loan it increases the risk profile since the person owes money to the bank. In essence, a person creates a huge liability by taking home loan and in case of an unfortunate death of the borrower, if the survivors can not pay the EMIs, then the bank has the right to sell the house to recover the loan amount.
This is the reason most housing finance companies will try to sell a protection plan (HLPP) to the home loan borrower.
A home loan protection plan is one whereby in the event of your death or disability resulting in loss of income, a sum of money will be made available towards the repayment of your loan. This ensures that your family or dependants do not have to worry about the loan repayment and your home will not be taken away by the bank.

How does HLPP works?

Let us take an example of a person taking home loan of Rs 20 L for the tenure of 10 years at say 12% interest, then the EMI calculated would be Rs 22021 per month. Let us assume that the borrower is paying the EMI regularly for next 10 years and now the outstanding loan amount is Rs 15 L. If the borrower dies after 10 years, the HLPP insurance will pay back the outstanding loan amount (Rs 15 L) to the bank. This is exactly similar to a term insurance plan except that the life cover will be equivalent to the outstanding home loan amount as per home repayment schedule (shown below).

Is HLPP same as Home Owner Insurance/Home Content Insurance?
The HLPP is fundamentally different than a House Owner Insurance or a Home Content Insurance. A Home Owner Insurance is insurance for the house (building structure) you have purchased (under construction or built) and provides protection against the risks to property such as fire, riot, flood or any weather damage. There are three types of coverage included in such insurance
  • Replacement cost coverage: Cost of replacement of property regardless of appreciation/depreciation
  • Actual cash value coverage: Cost of replacement minus depreciation
  • Extended replacement coverage: Cost of replacement including the increase in construction costs 
A Home Content Insurance is for the contents of your home. This coverage is for the loss or damage of the valuables inside the home like the electronic and electrical goods, furniture, clothing, jewellery and any other precious contents inside the home. The contents are covered on the market value of the items and in case of a loss the insurance claim is paid on the value of purchasing a similar new item exempting the depreciation value.
I will only talk about the HLPP in this post.

What are the cost of HLPP?
The HLPP costs are similar to the term insurance costs with various premium payment options. The various options as of now offered are:
1) Single premium payment: A single premium is paid while taking the insurance. Also most housing finance companies will try to club this single premium in the home loan amount itself.
2) Equated Monthly Instalments: This is similar to any other term insurance plan with premium payment frequency to be yearly, quarterly or monthly. In most cases this EMI is bundled with the home loan EMI. Some HFC have come up with reducing EMI plans since the sum assured also is reduced progressively.
3) Limited Pay Option: Some HFC provides the option of paying only till a limited duration within the loan tenure. For example, if loan tenure is 15 years, the option would be to pay EMI only till 10th year.
If you use the some home loan protection calculators, the premium amount for a home loan of Rs 20 L for 20 years tenure with age of borrower 30 years comes out to be
  • 49160 Rs for Single premium
  • 8870 Rs PA for Limited Pay Option [EMI till 13 years] : 115310 Rs Total
  • 6946 Rs PA for EMI Option for full tenure : 138920 Rs Total
The cheapest Term Insurance plan for the same Rs 20 L for 20 years with borrower's age 30 years is Rs 3060 per annum and hence total outgo is Rs 61200. [I used this calculator.]
These are just rough figures based on the websites of various companies. But it is clear that the cost of HLPP compared to a pure term insurance is almost the same.

So why HLPP is not a good option?
When cost is not a key deciding factor for choosing an HLPP Vs. Term Insurance plan, then what are the other issues with HLPP? Here are some of the problems:
1) A pure Term insurance cover remains constant for the entire tenure, while after each EMI, the HLPP cover reduces. This is not very helpful since for almost similar cost it is preferable to receive a fixed monetary benefit rather than a reducing one. Isn’t it better, that in the unfortunate death after 10 years, your family should get Rs 20 L (as in Term Plan) instead of a Rs 15 Lakh (as in HLPP) based on reduced outstanding loan.
Some insurance companies claim that they offset this difference by reducing the premium amount over the tenure, but it is important to note that as a person ages, his risk profile goes up and so does the insurance premium. So any offset in premium reduction to take care of reducing sum assured is balanced by increasing premium because of increase in risk profile due to old age. This premium calculation should be clarified with the insurance company before signing for HLPP.
2) It is well known that Interest Rate fluctuation causes a change in the home-loan EMI amount or loan tenure. Typically, rise of just 0.5% of interest rate would increase the EMI term for additional year, however HLPP does not give you insurance cover for those additional year. I could not find it in any documents on the website and hence it is advisable to check this while availing such scheme. Also if the interest rate falls and the period of the loan gets reduced (& if at all the banks pass the benefit to the end customer), then the refund from the insurance premium is minuscule. This  also needs to be clarified before taking up the HLPP.
3) There could be a chance of a home loan foreclosure for some borrowers. If the home loan is taken for a tenure of 15-20 years and over the tenure if the borrower received some surplus money due to variety of reasons, he/she may choose to repay the home loan prior to the tenure. In such a case, the home loan insurance becomes void. But a term plan will continue and provide the additional security.
4) A HLPP may become also void if you try to switch from one Home Loan lender to another, whereas a borrower typically does to get a better deal on home loan interest. If you switch the loan, then you need to buy another HLPP insurance from the other lender.  This should also be clarified before taking up the HLPP plan. A term plan will remain with you and protect you despite any number of switches of loan companies.
Here is the summary of all the points:
It is important to also look at the various charges as well as exclusions and compare with Term plans before going ahead with HLPP. Also it is not mandatory to buy an HLPP while taking a home loan (sometimes mentioned by person you are dealing with). So I would recommend a Term Plan since the benefits far outweigh that of HLPP.

Health Insurance Portability

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IRDA in its recent circular approved the portability of health insurance, allowing the customers to carry forward all the benefits of health insurance of previous policy to the new policy with different insurer.  This is really a good news for all of us, since choosing any particular health insurance is anyway an onerous task.

What exactly is portability?
To understand the benefits of portability, it is important to understand “what are the benefits health insurers provide for renewing the policy with same insurer”?
  1. Waiting period of pre-existing illness: Most health insurers in India have a waiting period of 2-4 years for inclusion of pre-existing illness. So if you take a policy today, expenses related to any pre-existing illness will not be covered till you continuously renew the policy for next 2-4 years.
  2. No claim bonus: Most health insurers offer a no claim bonus of 5-10% (discount) on the premium if you continue with the same insurer and have not made any claim for any medical expenses. Some insurers have introduced this discount on premiums irrespective of claim status.
  3. Initial waiting period after policy starts: Most insurers have a waiting period of 1-3 months when the policy comes into force, during which time only the accidental expenses will be covered but no other medical expenses can be covered. This waiting period does not exist if you re-new the policy with the same insurer.
  4. Waiting period of coverage of certain exclusions: Some insurers have a waiting period of 2-4 years for specific illness or for senior citizens. As an example, stone in kidney or cataract are excluded for 2-4 years if a senior citizen starts a new health insurance policy.
In essence, these are the benefits of remaining loyal to the same insurance company. In the current scenario, these benefits are lapsed if you try to switch to another insurance company, which is unfair as far as customers are concerned.

Why customers want to switch from one insurer to another?
There are several reasons why a person may want to switch to another insurer:
  1. Poor Service Record: This is the most common reason for switching to another insurer.
  2. Premium amount saving: Another insurance company may provide higher sum assured at lower premiums than the current insurance company.
  3. Specific coverage: The other insurance company may be providing coverage of any specific illness which the current insurance company is not providing. As an example, most personal health insurance policies does not provide cover for maternity expenses but Max Bupa policy provide that cover after a waiting period of 24 months.
So, IRDA plans to ensure that if a customer is not happy with his current insurance provider and wants to switch to another insurance provider, all the benefits accrued for continuing with the current insurance provider will remain intact and can be carry forward to new insurance policy. For example, if your current insurance policy has a waiting period of one year for pre-existing illness and if you switch to a new insurance company with new policy that has a waiting period of two years for pre-existing illness then with portability in place, you only have to waiting period of one year in the new policy for the pre-existing illness coverage. 

Issues with portability
The portability concept is definitely good for disgruntled customers but I think that it does come with some issues:
  1. The credit for the waiting period is limited to the sum assured under the previous policy. So for example your existing policy has sum assured at 2 lakhs and if you want to take up new policy of sum assured at 5 Lakhs with a different insurance company, the credit will only be applicable for the 2 Lakhs basis. This calculation can be very confusing for end customers.
  2. It will be a huge task for the end customer to find another policy that has all the benefits of his existing policy and some more at the same premium rate to motivate for a switch. For example, if a person wants to switch to insurance company B from insurance company A, say due to lot of paperwork and poor service related to claim settlement, he needs to ensure that insurance company B not only provides good service but also has similar benefits (similar coverage etc) of the policy as provided by company A. If that is not true, there is no point for making the switch.
  3. I believe that most insurance companies will close older policies and bring new policies to ensure that they do not loose due to the new portability rules from IRDA. This is because the entire concept of waiting period  came from the fact that companies wanted to retain their existing policy holders. This waiting period is typically useful in cases where the company increases the premium rates but the end customer has no choice to move to another insurance company since otherwise he would loose all the benefits. But with portability, most insurance companies loose this advantage. Hence, I think the policies will be changed. 
  4. There would definitely be cases where the current insurance companies will be reluctant to let the customer make a switch and may cause operational delays or may cause policies to expire due to variety of reasons. This may result in increase of complaints. [Similar thing has been observed in mobile number portability]
  5. Some insurance companies may try to ask customers to use credit cards to renew their policies. The trick is that in the “Terms and Conditions” section (one of the rarely read part) it could easily add a clause to give the right to the company to renew the policy (say one month before expiry) by charging the credit card automatically. This is typically done by web-hosting companies. This ensures that onus of cancelling the renewal payment lies with the customer who in majority of cases will forget the policy expiry dates.
I do think that portability game will bring some standard into the health policies and it will be easier to compare them but it will also bring some of its own issues.

Succession Certificate–what and how?

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I got a nice comment on my earlier post on nominations which mentioned a slight correction in the post about the PPF withdrawal limit of 1 Lakh. The comment mentioned that if the person has a succession certificate then the entire amount will be given to the legal heirs. Let us talk more about this “succession certificate”.
A succession certificate is a document obtained for a deceased person who did not have a will. It contains the list of deceased person’s debts and securities. The problem is that most people think that if the succession certificate is obtained then the person is the rightful owner of the deceased person’s properties, which is not the truth.
A succession certificate allows the person to act exactly similar to how a nominee would act. It gives the authority to the holder for distributing the deceased person’s assets. So how would the person decide to distribute the assets? He has to look at the succession law and based on that he decided to distribute the assets.

The way to obtain the Succession Certificate is to
  1. Make an application to the district judge (where the deceased person is residing).
  2. The application should contain details about the time of death of the deceased person, the place of his/her residence, details of all the legal heirs, the debt and securities in respect of which the certificate is applied for etc
  3. If the district judge is satisfied with the application and accepts the legal ground for entertaining the application, he may assign a hearing date.
  4. The court will issue notices to all the concerned parties (typically all legal heirs).
  5. A newspaper notice has to be issued apart from the mandatory notice to the respondents. A typical wait period for this notice is 1.5 months from the date of publication.
  6. After the hearing, if the district judge decides that the right of Succession Certificate belongs to the applicant, the judge will pass the order to grant the certificate.
  7. Once the order is passed, the applicant has to submit judicial stamp papers and court fees as per the court rules.
  8. It is important to note that the court fee is a percentage of the value of the asset with a maximum limit. So if the asset value is very high, the court fees could actually be very handsome. (Say for flat of Rs 40 Lakh, the fees could be Rs 75000)
  9. It typically takes 3-4 months for the entire procedure to be completed and getting the certificate.
  10. Once you have the certificate, you are authenticated to distribute the assets to the legal heirs as per the succession laws.
The succession laws in India are very complicated and are very different based on a person’s religion (for e.g. Hindu Succession Act & Christian Law of Succession).
Disclaimer: Please note that I am not an expert in legal laws and it is advisable to visit a qualified lawyer for any truthful information on such laws before making any legal moves.I do not take any responsibility, if you read this post and act based on it.