When a consumer takes a home loan he incurs a large liability, a big burden on his family if he died during the tenure.
It makes sense for him to buy a life insurance policy that will pay off the home loan in the event of his death. It is imperative that such a crucial policy should not lapse. Typically, a single premium is normally paid, so that the policy does not lapse during the loan tenure. The bank is also benefited, as its loan will not turn bad because of the consumer's death. It is happy to finance this single premium and treat it as an additional loan amount. Effectively, the consumer ends up paying for the policy in easy instalments. Since banks have a large number of such consumers, they can get a group for a better deal. This can be smoothly administered and the lender gets additional income as commission on the policy sold.
It is this ability to make additional income from a lending transaction that can and does lead to trouble. The need for additional commission income completely overshadows the basic primary utility of such insurance, both to the lender as well as the consumer. The group policies negotiated by the lender are normally at far higher premiums as compared to similar policies directly available from the market to the consumer (sometimes even from the same insurer). Since it is a legitimate credit requirement of lenders that the consumer adequately insures his risks, lenders are able to push through compulsory purchase of the group policy negotiated by them, despite the practice being frowned upon or being downright banned by regulators. This misuse of what is otherwise a very useful instrument is hardly a unique invention. We have already seen the multi-million-pound penalties imposed by the UK's FSA on major UK lenders in the Payment Protection Insurance mis-selling scandal.
In India, we now have the Insurance Regulatory and Development Authority of India (Irda) order to refund Rs 275 crore (to borrowers), of excess commission paid by SBI Life Insurance Company to lenders (primarily to State Bank of India group but including a few housing finance companies like Dewan Housing and Sundaram BNP Paribas). The excess commission was due to wrongly treating single-premium policies (on which very low commissions are payable) as two-year policy premium payment policies.
This order has already been appealed against but it puts the spotlight on the practice of lenders to club sales of group insurance policies with their loans and the pricing of such policies. In fact, the order does not even dwell on the pricing of the single-premium Dhanraksha Plus Policy, which is at a good 40 per cent premium over the single-premium version of the Decreasing Term Insurance Plan (SBI Life Saral Shield). This should have alerted Irda when the Dhanraksha Plus was approved because the decreasing term insurance policy appears to be superior or equal to the Dhanraksha Plus, while the premiums are considerably cheaper.
This practice also calls for intervention from the lending regulators (Reserve Bank of India and National Housing Bank), with specific regulations governing the practice of clubbing insurance sales with lending. This might be good for the lenders themselves. While it is not completely clear, it appears from the earlier Irda order of September 2012 that the bank had not even got the insurance policy assigned in its favour. As a result of which, the regulator questioned the payment of the claim amount to the lender instead of the policyholders.
What can you as a consumer do in the meantime? Covering your risk when you take a large loan is a good idea, so you should definitely buy an insurance policy. But don't let the lender force you into buying the policy promoted by it. If you resist, the bank will let you buy the policy from outside. You can go online to buy an appropriate policy. But if you can't do that, then even buying an expensive insurance policy from the lender itself is preferable to not buying any policy at all.
Let your family inherit your home, not your home loan. This is not only an advertisement tag line; it makes eminent sense as well.
It makes sense for him to buy a life insurance policy that will pay off the home loan in the event of his death. It is imperative that such a crucial policy should not lapse. Typically, a single premium is normally paid, so that the policy does not lapse during the loan tenure. The bank is also benefited, as its loan will not turn bad because of the consumer's death. It is happy to finance this single premium and treat it as an additional loan amount. Effectively, the consumer ends up paying for the policy in easy instalments. Since banks have a large number of such consumers, they can get a group for a better deal. This can be smoothly administered and the lender gets additional income as commission on the policy sold.
It is this ability to make additional income from a lending transaction that can and does lead to trouble. The need for additional commission income completely overshadows the basic primary utility of such insurance, both to the lender as well as the consumer. The group policies negotiated by the lender are normally at far higher premiums as compared to similar policies directly available from the market to the consumer (sometimes even from the same insurer). Since it is a legitimate credit requirement of lenders that the consumer adequately insures his risks, lenders are able to push through compulsory purchase of the group policy negotiated by them, despite the practice being frowned upon or being downright banned by regulators. This misuse of what is otherwise a very useful instrument is hardly a unique invention. We have already seen the multi-million-pound penalties imposed by the UK's FSA on major UK lenders in the Payment Protection Insurance mis-selling scandal.
In India, we now have the Insurance Regulatory and Development Authority of India (Irda) order to refund Rs 275 crore (to borrowers), of excess commission paid by SBI Life Insurance Company to lenders (primarily to State Bank of India group but including a few housing finance companies like Dewan Housing and Sundaram BNP Paribas). The excess commission was due to wrongly treating single-premium policies (on which very low commissions are payable) as two-year policy premium payment policies.
This order has already been appealed against but it puts the spotlight on the practice of lenders to club sales of group insurance policies with their loans and the pricing of such policies. In fact, the order does not even dwell on the pricing of the single-premium Dhanraksha Plus Policy, which is at a good 40 per cent premium over the single-premium version of the Decreasing Term Insurance Plan (SBI Life Saral Shield). This should have alerted Irda when the Dhanraksha Plus was approved because the decreasing term insurance policy appears to be superior or equal to the Dhanraksha Plus, while the premiums are considerably cheaper.
This practice also calls for intervention from the lending regulators (Reserve Bank of India and National Housing Bank), with specific regulations governing the practice of clubbing insurance sales with lending. This might be good for the lenders themselves. While it is not completely clear, it appears from the earlier Irda order of September 2012 that the bank had not even got the insurance policy assigned in its favour. As a result of which, the regulator questioned the payment of the claim amount to the lender instead of the policyholders.
What can you as a consumer do in the meantime? Covering your risk when you take a large loan is a good idea, so you should definitely buy an insurance policy. But don't let the lender force you into buying the policy promoted by it. If you resist, the bank will let you buy the policy from outside. You can go online to buy an appropriate policy. But if you can't do that, then even buying an expensive insurance policy from the lender itself is preferable to not buying any policy at all.
Let your family inherit your home, not your home loan. This is not only an advertisement tag line; it makes eminent sense as well.
The writer is CEO, ApnaPaisa