There are many cases where the loan applicant goes to purchase a home loan, but the lender pressurises the loan applicant to get a life insurance policy. Even after submitting all the required documents and having a good credit score, if some bank asks an applicant to get an insurance plan, the first thing that comes to mind is that – ‘is it mandatory?’
The answer is no, it is not mandatory to buy an insurance plan with a home loan, and nobody can compel you to do so. No bank or non-banking organization can force you to take a life insurance policy with a home loan. None of the regulatory bodies like RBI or IRDA nor the law has made it mandatory to buy a life insurance policy at the time of taking a home loan.
The Issue
A home loan is bought to ease the financial burden on the house owner and ensure timely completion of construction of the house, as building a home involves a huge amount. The lenders lending out home loans usually insist on taking an insurance policy so that it covers the liability of the applicant’s family of paying off the home loan if anything happens to the customer. This way, even the lender is at peace that the insurance policy will cover the debt in case of the untimely death of the owner of the house.
Term insurance makes an ideal option to take care of this problem for both the lender as well as the loan applicant. The term insurance is introduced for such high-risk circumstances and offers high cover at low-cost premiums. Banks usually suggest going for a single premium term insurance policy and add that amount to the loan. So that the borrower doesn’t have to pay upfront and can get insured too. The EMI amount may increase but not that significantly.
Despite this, some banks insist and pressurise the borrower on buying a life insurance policy with the home loan.
Is it helpful to buy a life insurance policy with a home loan?
Having term insurance is not a bad idea. While it provides you with a good life insurance cover, it also takes care of the repayment of the home loan. Your family can be at peace as there won’t be any repayment burden after you. Also, it will take care of their future needs in case of your untimely death.
You can claim tax benefit on term insurance under Section 80C and Section 24 of the Income Tax Act for paying home loan premium. Keep in mind that while you can transfer the home loan to another bank as per the facility, the life insurance policy cannot be transferred.
What should you do in such a situation?
If you do not have a good term insurance plan, then consider your family’s current and future needs with inflation rates, add home loan amount to it and buy a term insurance plan as suggested by the lender of the home loan. But if you already have an extensive life insurance policy that covers the cost of living of your family after you, then just top up that plan with the home loan amount.