Should You Buy Home Loan Protection Plan

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).
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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:
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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.

14 comments:

  1. Very useful information. I have just cancelled the plan of purchasing HLPP with my home loan after reading the article.

    Thanks

    Tarun Arya
    Noida

    ReplyDelete
  2. Very useful information. I have just cancelled the plan of purchasing HLPP with my home loan after reading this article.

    Thanks
    Tarun Arya
    Ghaziabad

    ReplyDelete
  3. Very useful information. I have just cancelled the plan of purchasing HLPP with my home loan after reading this article.

    Thanks
    Tarun Arya
    Ghaziabad

    ReplyDelete
  4. Anonymous10:27 AM

    Thanks for the detailed information.I am also cancelled HLPP after reading your article

    Cheers,
    Sateesh
    +Hyderabad

    ReplyDelete
  5. Anonymous9:35 PM

    Thanks for sharing important information, i was confused between HLPP & Term Insurance, now i m clear, soon will buy online term plan.

    Reg.
    Vinay Utekar
    Mumabi

    ReplyDelete
  6. I am in plan of taking a loan of 25 lacs from lic housing finance for 20 years. can u please suggest some term plans to cover this?

    ReplyDelete
  7. Very good information. Can I assign the online term plan which I have taken to the housing finance bank? Also what is the difference between claim settlement methods of both of these plans (Term insurance and HLPP)? Please give your valuable comments

    ReplyDelete
  8. Thanks Vikas for visiting the blog. I dont think you can assign the term plan to house loan. But it doesnt make sense to assign anyway.

    The only difference I see is that with HLPP you may have to deal with just your bank while in case of term plan you need to claim the money from life insurer and then submit the money to close the home loan. Actual formalities may vary across insurers/banks.

    ReplyDelete
  9. Thanks for great information you write it very clean. I am very lucky to get this tips from you.

    HFC PPI Claims

    ReplyDelete
  10. this post help me to understand the HLPP and why to use it. this is informative post for me.
    Home loan utah

    ReplyDelete
  11. Anonymous4:27 PM

    I have forclosed my home loan and and got money back by forclosing the HLPP. so its worong to say that HLPP will become void after forclosing home loan.

    Also some of the banks will allow to transfer the HLPP to the new home owner also in case of sale of property

    Also HLPP is eligible for tax exemption under section 80cc.

    ReplyDelete
  12. Susheel4:50 PM

    Hi,
    I want to ask 2 things-
    1) Is it possible if i can get refund of the Home Loan Insurance?

    2) Can we show Home Loan Insurance against the Tax Saving (rebate)? Under which section?

    Thanks
    Susheel

    ReplyDelete
  13. Anonymous11:22 AM

    Even I cancelled my HLPP, thanks

    ReplyDelete