Group life insurance with home loan: Things you should always keep in mind

To lure a loan borrower to also buy an insurance product at one go, the lender may offer a slight discount on the interest rate. Should that lure you to purchase the bundled arrangement?

When you apply for a home loan, the lender is most likely to bundle life cover. The product is meant to cover the payment of loan amount, in case of untimely death of the borrower. To encourage a borrower to buy this group insurance product, some lenders may be willing to offer a marginally lower interest rate as well. The cover, in principle, sounds good because a borrower needs to have some insurance when taking a loan. This is to ensure that there are no hardships if the borrower passes away. However, there are other options of getting this cover as well – for example, term insurance.  

Term life insurance, a popular insurance product, pays the sum assured in case of death of the life assured against a fixed premium paid at a regular interval or the beginning of the policy. This is a pure life cover, which will not give you anything if you survive the policy.

Bundled products: The person is offered a life cover on a group platform – technically known as group credit life insurance. The customer is offered a single premium life insurance cover when he is signing for the loan. The sum assured is the loan outstanding. As the borrower starts paying the mortgage EMI, the outstanding loan amount goes down. This is typically called marginal reducing term insurance (MRTI). If the borrower dies during the loan period, the life insurance company pays the loan outstanding. “The advantage of such a cover is that one can secure the loan liability, independent of other insurance covers that one may have,” says Suresh Badami, Executive Director, HDFC Life.

There are several advantages of such products. There is ease of purchase because it is an ancillary benefit in the overall borrowing process. So, you are unlikely to be rejected. “Being a group insurance product, the paperwork is minimal, and hence the issuance of the policy is hassle-free. In case of a claim due to an unfortunate event, Bank/NBFC as a bancassurance partner usually gets involved. Hence it becomes convenient for the nominee,” Badami points out.

And there are no premium payment worries since it is a single premium product.  “The EMI of your home loan may include this as well. Thus, you don't have to keep in mind the premium payment schedule as in a standalone term plan,” says Naval Goel, CEO, PolicyX.com. And there is ease in claim settlement as well.

Term plans: In comparison, buying a pure term life insurance could be tedious. One may have to find out the product that best suits his/her needs, and may have to undergo a battery of medical examinations before the policy lands in his hand. This could be an uphill task if the borrower is not a young individual and sum assured is significant, typically in excess of Rs 1 crore.

“A bundled life cover along with the home/personal loan may come in handy in the event of the untimely death of the policyholder. However, a bundled product may not provide as much coverage and fall short of the policyholder’s requirement. The advantage of having a standalone term insurance policy is that when bought at a young age, the premium is quite cheap for a much larger cover,” says Santosh Agarwal, Chief Business Officer- Life Insurance, Policybazaar.com.

Also, the sum assured offered on term life insurance remains constant for the entire policy tenure. But the sum assured for the MRTI keeps falling as you keep paying the loan.

In case of balance transfer: When one takes a loan from lender A, but wants to shift to lender B for lower interest rates or service quality or any other reason, the MRTI cover does not shift, and the new lender may make the borrower buy a new cover- often bundled with the home loan.

If you have bought a term life insurance cover on your own, you can continue with the same. If you are young, it is ideal to buy a large term life insurance cover. But if you want to keep the loan liability separate and want to go convenient way, then MRTI could be the solution.