Recently i received lot of queries from my readers regarding Home Loan Protection Plan (HLPP). At the time of availaing Home Loan, almost all Home Loan Lenders insist the Borrower to buy Home Loan Protection Plan & pitch it as compulsory buy for availing Home Loan. Let me clarify, it is not mandatory & compulsory to buy Home Loan Protection Plan while availing Home Loan. It is at the discretion of Borrower, whether he would like to avail HLPP cover or not. Home Loan lender cannot force Borrower to buy this cover. It is especially pushed by Home Loan lenders, whose sister concerns provide this kind of plan like SBI, HDFC, Kotak or ICICI.
Before we start, let me explain what is Home Loan Protection Plan?
Home Loan Protection Plan is nothing but a Single Premium Term Insurance Plan, which covers the outstanding Home Loan taken by a Borrower at any given point of time e.g. If i took a Home Loan of 50 Lacs and also buy Home Loan Protection Plan to cover my Home Loan amount. God forbids if something happen to me after 4 years and my outstanding loan is 38 Lacs at the time of death then HLPP provider will clear my outstanding Home Loan and my dependents / legal heirs need not to worry regarding my outstanding Home Loan.
Now let us examine 5 reasons, why you should not buy Home Loan Protection Plan becoz of its inherit disadvantages
1. Home Loan Protection Plan is too costly compared to pure Term Insurance:
The premium of HLPP is much higher compared to pure Term Insurance Plan. When i took Home Loan, HDFC ERGO offered me HLPP cover for my Loan Amount & quoted me premium of approx 1.3 Lacs for 5 years but when i checked Pure Term Insurance Plans offered online then the premium for cover equivalent to my Home Loan was approx 12,000 p.a. i.e. 48k for 5 years. What it implies that Home Loan Protection Plan premium is almost 2.7 times the premium of Pure Term Insurance Plan. This ratio might vary from case to case depending on the age of the borrower but this ratio will be double for sure. Financially it makes wiser decision to buy pure term insurance rather going for Home Loan Protection Plan. Pure Term Insurance Plan is most economical way of covering your Home Loan compared to Home Loan Protection Plan.
2. Home Loan Protection Plan Cover is Valid only for 5 Years
The Protection Cover of HLPP is mostly valid for 5 years not for the whole term of the Home Loan and after 5 years, it needs to be renewed whereas Pure Term Insurance Plan Cover is applicable through out the Life of insured person.
3. HLPP is a Single Premium Policy
This is the biggest disadvantage of HLPP. Normally, the Home Loan Lender project that Borrower need not to pay anything for this cover as the Premium of HLPP will be added to the Home Loan Amount and can paid along with monthly EMI. As a borrower, i need to understand that my Home Loan interest rate is 11% and if i add premium of HLPP to the Home Loan amount then effectively, i am also paying interest of 11% on the premium of the Home Loan Protection Plan. The net premium of the HLPP will be much higher, if i include the 11% interest i paid on the premium amount of HLPP. Whereas in pure term insurance plan, i have liberty to pay the premium on annual basis therefore it will not be much burden on my pocket as i have to pay small amounts at regular intervals & amount will be lower compared to HLPP
4. Home Loan Protection Plan does not cover death under Natural Reasons or Suicide
By adding this clause, HLPP provider is minimizing its risk as Natural Death is defined as death caused by illness or internal malfunction of the body e.g. Heart Attack, death due to some complications like infection etc (Source: Wikipedia). Also note that Pure term insurance plans cover Natural Death & also cover suicide after 1 year from commencement of policy whereas HLPP does not cover Natural Death & Suicide.
5. Home Loan Protection Plan cover is not Constant but Depleting in nature
This is quite interesting and most important point to note. Now take case of 2 best friends Person A and Person B, who bought a flat together in same apartment. Person A has taken Home Loan of 60 Lacs and opted to HLPP & Person B has also taken Home Loan of 60 Lacs but he opted for Pure Term Insurance Plan of 60 Lacs.
Assuming that in an unfortunate event both died together after 4 years in a road accident. Now Loan outstanding of Person A and Person B was 46 Lacs each at the time of death.
In case of Person A, HLPP provider will pay the 46 Lacs to Home Loan Lender and clear off the Loan amount pending. Whereas in case of Person B, the term insurance provider will pay 60 Lacs to the legal heirs of Person B. The Legal Heir of Person B can use 46 Lacs from 60 Lacs to clear off the Loan and Balance 14 Lacs can be retained & used for other purpose like education or marriage of child of Person B.
From above e.g. we observed that if borrower opt for HLPP then at any given point, the liability of HLPP provider is restricted only to Loan outstanding though cover was for 60 lacs at the time of availing loan. Therefore HLPP is depleting in nature & cover keeps reducing with payment of principal amount whereas Pure Term Insurance Plan over is Constant in nature.
6. HLPP becomes null & void in case of Foreclosure of Loan
On an average all Home Loans are closed within 7- 8 years. If average is 7-8 years then we can assume that 30% loans are closed within 5 years becoz of increasing income levels. If u have take HLPP for 5 years and you close your Home Loan in 3 years then you will not get any refund of premium and by default your HLPP will become null and void. Even if u pre-pay part of ur loan then ur HLPP cover will reduce in line with Principal outstanding.
7. HLPP becomes null & void if Home Loan is shifted to New Lender
Now the prepayment penalty is being abolished and many borrowers are taking advantage of lower interest rate offered by other banks. But before switching your Home Loan for lower interest rate, pls note that your HLPP with existing lender will become null and void if Home Loan is switched to other lender. Premium paid will not be refunded back.
Home Loan is a big liability and it is important that we should take appropriate cover during our lifetime to cover the Home Loan Liability. Life is very uncertain and Home is the most precious gift which a person can leave for his near and dear ones. To ensure that after us, our loved ones should not face any hardship to clear the loan outstanding, it is important to buy term insurance plan covering the Home Loan amount. This is very crucial step to secure the future of our family.
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