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Varun and Nisha are in the process of getting the home loan approved for the plush 3bhk flat that they have zeroed in on. They have submitted all the documents required by the bank and are awaiting the approval letter.

As they wait, Varun gets a call from his bank informing him that it is mandatory to apply for a home loan protection plan (HLPP) and only after that can his home loan request be processed. Varun is confused about this new requirement. He calls his friend Raghu who happens to dabble in financial products. Raghu informs him that as per the prevailing law, RBI or IRDAI, it is not mandatory to buy a home loan protection plan for getting a home loan. He advises Varun to ask the bank to give in writing that an HLPP is mandatory for them to issue the home loan.

Varun calls the bank and asks them to issue a formal communication to this effect. The bank immediately backs off and his home loan is sanctioned after scrutiny of the home loan-related documents. Varun was lucky that he had Raghu to look up to for advice. However, most of us would have just gone ahead and done the bank’s bidding to ensure that there are no hurdles in getting the home loan processed. So, what is HLPP and how does it help?

hlpp vs term plan

What is HLPP?

Home loan protection plan or mortgage insurance or home loan insurance is a type of insurance in which the insurance company pledges to pay the outstanding home loan amount of the insured to the lender should the borrower (insured) pass away before completing the home loan repayment or in case the borrower loses his regular income due to full or partial disability. In simple words, HLPP is the insurance coverage for the home loan amount.

Is it the Same as Home Insurance?

No, home loan insurance and home insurance are not the same. Home loan insurance deals with insuring the home loan whereas home insurance refers to insuring the home and its belongings etc.

Features of HLPP?

  1. It is mostly a single premium product.
  2. As the amount of premium is quite high, lenders usually add the premium amount to the loan amount.
  3. The premium gets paid along with the monthly loan EMI.
  4. The insurance coverage amount is equal to the outstanding loan amount i.e. follows reducing coverage concept and keeps on reducing as the EMIs get paid by the borrower. For eg: If the premium for a Rs 30 lakh loan is Rs 1.5 lakhs, then this amount gets added to the loan amount and EMIs are deducted for Rs 31.5 lakhs.
  5. The coverage comes to an end when the borrower makes full repayment of the home loan.
  6. In case of the death of the borrower, while he is servicing the loan, this insurance company directly pays the home loan balance amount to the lender and the dependents of the borrower do not have to worry about sourcing funds to service the loan.
  7. HLPP ensures that the home is not confiscated by the lender in case the borrower’s dependents are not able to pay the EMIs after the borrower’s demise especially if he was the breadwinner.
  8. In case of home loan transfer from one lender to another to avail lower interest rates or any reason whatsoever, the HLPP usually ceases to exist i.e with the home loan the HLPP does not get ported to the new lender. The reason is that these plans are under the master policy between the lender and the insurance company.
  9. These plans are usually sold along with the home loan and it is difficult to directly buy it on your own from the market.
  10. Under Section 80C & 80D, the borrower gets tax benefits from home loan insurance.
  11. By paying an extra premium, disability and critical illness riders can also be added to the home loan insurance plan.

Home Loan Protection Plan vs Term Insurance Plan

Now that we are acquainted with HLPP its features, it is time to ask which is best for people with home loans to buy, an HLPP or a pure term life insurance plan. Most experts opine that it is best to buy a term life insurance cover for the home loan amount rather than an HLPP. The reasons for this opinion are shared here: 

  • HLPP is Much Costlier Than a Term Plan: The premium of a home loan protection plan is much higher than that of a term life insurance policy for the same amount of insurance coverage. Even if the one time premium for HLPP is broken down into an annual basis for comparison, it is more than 100% (this will vary depending on the age of the borrower) higher than that of a term life insurance premium. Sample this table taken from www.switchme.in dated Nov 19, 2018:

Home Loan Insurance Plan

Premium (Annual)

IDBI Federal Homesurance Plan

Rs. 8,642/-

Bajaj Allianz Protector

Rs. 14899/-

Term Plan Insurance Plan

Premium (Annual)

SBI Life Insurance

Rs. 4,015/-

Reliance Life Insurance

Rs. 3,673/-

  • HLPP is a Single Premium Product: Being a single premium policy, the one-time premium outgo can be a big burden financially. However, most banks/lenders will not ask you to separately pay the single premium amount from your pocket. They may just add it to your loan amount and you will pay the premium along with the loan EMI. This may appear as a sound choice to you, however, wait before you rejoice.

    For eg: If the premium for a home loan of Rs 30 lakhs is Rs 1 lakh, then the total loan amount would be Rs 31 lakhs after adding the premium. You would pay EMI for Rs 31 lakhs. As the premium is clubbed with the loan amount, you will end up paying interest on the premium amount too and this will further increase the cost of the premium for the HLPP. Whereas with a term insurance plan you can pay premiums on an annual basis or even semi-annually, quarterly, etc at extra cost. 

  • HLPP Has a Depleting Insurance Cover: In the case of a term life insurance plan, the insurance coverage once chosen remains constant throughout the tenure of the policy. This is one area in which HLPP majorly differs. The insurance coverage of an HLPP is equal to the outstanding home loan amount and as the home loan amount reduces, the cover reduces to the same extent and when the borrower makes entire loan repayment the HLPP ceases to exist.

    Illustration: 

    Sarvesh and Mukesh are good friends who buy flats in the same complex at the same time. They also take identical loans for Rs 40 lakhs for 15 years. Sarvesh opts for an HLPP for the outstanding loan amount i.e Rs 40 lakhs. Mukesh prefers to cover his home loan by purchasing a term life insurance policy for Rs 40 lakhs.

    Case 1

    After 8 years, both of them close their home loans through prepayment. In Sarvesh’s case, the HLPP ceases as his loan repayment is over. However, the term life insurance still covers Mukesh’s life for Rs 40 lakhs and should he meet with unfortunate death during the policy tenure, his nominee will receive Rs 40 lakhs.

    Case 2

    In the sixth year of the loan, when both have an outstanding loan of Rs 15 lakhs, they both tragically died in a road accident together. As Sarvesh has an HLPP, the insurance coverage is equal to the outstanding loan i.e. Rs 15 lakhs. Accordingly, the HLPP pays Rs 15 lakhs directly to the lender bank and clears the dues and the HLPP ends. In Mukesh’s case, as the term insurance cover remains constant, the life insurance company pays Rs 40 lakhs to his wife who is the nominee. With this amount, she repays the outstanding loan amount of Rs 15 lakhs to the lender bank and she is left with a balance of Rs 25lakhs which she can use to financially secure her and their kids’ future.

    Thus, a term plan is not just cost-effective, it can help better manage the home loan liability. 

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  • HLPP is Usually Valid for 5 Years Only: A HLPP is usually valid for 5 years only and posts that you will have to buy a fresh HLPP. On the other hand, term plans have policy tenures of large durations such as 15, 20, 25 years and some provide coverage for life. 
  • HLPP Becomes Null and Void in Case of Loan Foreclosure: Home loans are long-duration loans going up to a maximum tenure of 30 years. It is observed that on average people tend to pay off their home loans in around 8 years. Due to rising income levels and double-income families, many people may be even closing their home loans within 5 years. Assuming that you close your home loan in 4 years, your HLPP will become null and void and you will not receive any refund of the premium through the HLPP is for a 5-year tenure and you have paid a premium for 5 years. 
  • HLPP Cannot be Ported to Another Lender: Home loans can be transferred from one lender to another in case your bank is refusing to reduce the interest rates whereas the other bank is offering you a reduced rate or for any other reason(s). Here it may be noted that though the home loan can be ported the HLPP cannot be transferred and becomes null and void. The reason is that these plans are typically under the master policy between the lender and the insurance company. Premiums paid are not refunded.  Similarly, in case you extend your loan repayment tenure, your policy might not be able to provide you protection for the whole term. 
  • Tax benefits may not apply in case the HLPP premium is part of home loan EMI: Tax deductions under Section 80C of the Income Tax Act can be availed in case you are making a premium payment for home loan insurance coverage. However, this does not hold good if you have borrowed money from your bank for premium payment and the amount is included in your EMI.  
  • HLPP does not cover death due to natural causes or suicide: To minimize risk, HLPP does not cover death due to natural causes or suicide. Term plans cover death due to natural reasons and even suicide is covered after the first policy year. 

Conclusion

A home is a precious gift that we give our loved ones and each of us would want to pass on a home as a legacy to our dear family and not the burden of a home loan. A home loan is a huge liability. A responsible act on our part is to have a plan in place to pay off the loans without causing any inconvenience to our loved ones should we pass away before repaying the loan. A term life insurance plan for the home loan amount can help in ensuring that our family does not face the ignominy of losing their home or having to run from pillar to post to arrange for funds to pay off the loan.

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Sindu Ramankutty has 10 years of Life Insurance Operations and Customer Service experience. She has worked with two leading private life insurers. She has a PGDBM (General Management) from Narsee Monjee Institue Of Management Studies (NMIMS) Global Access, Licentiate from Insurance Institute of India (III) and ALMI from LOMA.