When you sign your home loan, the bank may offer you insurance. Sometimes more than one kind. It helps to know what each one does, so you buy what you need and nothing you do not. This guide explains the three types, shows the cost arithmetic, and lists the questions to ask before you sign.
Three kinds of cover
- Loan cover: pays off the loan if a borrower dies or, in some plans, becomes disabled.
- Property cover: pays for damage to the building from fire, flood and similar events.
- Contents cover: pays for your furniture, electronics and belongings.
Loan cover: protecting your family
If something happens to you, your family would still owe the loan. Loan cover, often linked to the loan, pays it off. A plain term life insurance policy you already own can do a similar job, if the cover is enough.
There are two common designs:
- Reducing cover: the sum insured falls as your loan balance falls. It matches the debt closely and usually costs less.
- Level cover: the sum insured stays the same throughout. Usually a plain term plan. Once the loan is small, the extra cover goes to your family.
How much cover? A quick sum
Illustrative only. Suppose you borrow ₹48 lakh. In the early years, almost all of it is still owed. A term policy of at least ₹48 lakh would clear the loan if the worst happened. Many families add a little more, for living costs, so the home is free and there is money to run it.
Property cover: protecting the building
Many lenders want the home insured against damage, because it is their security. In an apartment, the association may insure the whole building. Ask what is covered and whose name is on the policy.
Property cover is usually based on the cost of rebuilding, not the market price. The land does not burn, so it is not insured. For a flat, the building structure is often insured once for everyone, and you insure your own interiors.
Contents cover: protecting your belongings
This is your choice. Lenders do not usually need it.
If you spend, say, ₹8 lakh on modular kitchen, wardrobes and appliances, a contents policy is often a small yearly cost compared with replacing all of that after a fire or theft.
Required or just offered?
Regulators have said borrowers should be free to choose their own insurer. A lender should not tie your loan to buying one particular policy from it. Ask the lender to write down which cover it actually requires.
Single premium or yearly premium?
Some loan cover is sold as one big premium, added to your loan. That means you pay interest on the premium too. A yearly premium paid separately can be easier to compare and stop.
Worked example (illustrative)
Say a single premium of ₹1,20,000 is added to your loan at 8.5% a year for 20 years. Using the standard EMI formula, that adds about ₹1,041 to your monthly EMI. Over 240 months you repay about ₹2,49,900 for that ₹1,20,000 premium, roughly double. Paying the premium from savings, or choosing a yearly plan, avoids the interest. Always ask the lender to show the premium separately so you can see this.
Step by step: choosing your cover
- Ask the lender, in writing, which insurance is a condition of the loan.
- List any life insurance you already have and its sum insured.
- Compare the loan cover on offer with a plain term plan for the same amount and years.
- Check whether the premium is single or yearly, and whether it is added to the loan.
- Read what happens if you prepay, switch lenders or close the loan early.
- Check the exclusions, waiting periods and what counts as disability.
- Ask the association, or the builder until handover, about building insurance.
- Keep every policy with your loan papers, and tell your family where they are.
Making a claim
If the bank's name is on the policy, a claim payout may go to the bank first to clear the loan. Keep policy papers with your loan papers and tell your family where they are.
Make sure a nominee is named on every policy, and that the nominee knows the policy exists. A policy no one knows about cannot be claimed.
Common mistakes first-time borrowers make
- Signing every form the bank hands over without asking which ones are optional.
- Buying loan cover when a term plan already covers the loan. You may be paying twice.
- Insuring only one co-borrower when both incomes pay the EMI.
- Not checking cover on a balance transfer. If you move the loan to another bank, the old policy may not follow.
- Forgetting disclosures. Answer health questions honestly. Wrong answers can lead to a rejected claim.
- Losing track of the policy once the loan is running.
Two families, two choices (illustrative)
Made-up examples, only to show the thinking.
Family A takes a ₹48 lakh loan. Only one partner earns. They already hold a ₹25 lakh term plan from before. The gap is about ₹23 lakh, so they buy an extra term plan for ₹25 lakh, paid yearly, rather than a single-premium loan cover added to the loan. The new plan is in their own name, with the spouse as nominee, and stays with them even if they switch banks.
Family B takes the same loan, but both partners earn and share the EMI equally. Each buys term cover for at least half the loan, so if either income stops, the other can still clear it. They also take a small contents policy for their furniture and appliances, and confirm with the builder that the building itself is insured until the association takes over.
Neither family bought every product offered. Each worked out the gap, then filled it.
Questions to ask before you sign
- Which insurance, if any, is a condition of this loan? Please put it in the sanction letter.
- Can I use my existing term plan instead?
- What is the total premium, and is it added to the loan amount?
- Does the cover reduce with the loan, or stay level?
- What refund applies if I close or move the loan early?
Get every answer in writing, by email at least. If the answer to the first question is "none", you are free to choose your own cover, from any insurer, at any time during the loan.
What to keep in your loan file
- The loan sanction letter, stating any insurance condition.
- Every policy document and premium receipt.
- The nominee details for each policy.
- A note of the claim phone number and the process.
- The building insurance details from the association.
A word on tax
Under the old tax regime, premiums for life insurance on your own life can count towards the Section 80C limit, which is shared with your home loan principal and other items. Check which regime you file under before counting on this.
Quick checklist
- Is the cover amount enough for the loan?
- Does it reduce as the loan reduces?
- What happens if you switch lenders?
- Is the premium added to your loan?
- Are both earning co-borrowers covered?
- Who insures the building, and what does it cover?
New to all this? Our first home guide walks you through every step, from saving to registration.
