Many families have lost their breadwinners during the Covid pandemic. Those that had taken a large home loan without purchasing an insurance policy to cover this liability are staring at the risk of losing their house. Even worse is the plight of families that had purchased a cover but are still not being compensated. The reason: The breadwinner had—either due to mis-selling or oversight—bought a policy that does not cover death.
Avoid wrong covers
Many types of policies are sold under the moniker “loan protector cover”. General insurers, for instance, sell policies that pay up if the insured contracts one of the named critical illnesses, meets with a personal accident, suffers disability or job loss. Different policies may cover different permutations and combinations of these risks.
Sometimes, property insurance, which covers the building and its possessions against risks like fire, natural calamities, etc. is mis-sold with a loan.
Borrowers should not go by the name of the policy. They must understand what it covers. “The primary risk here is that of the insured losing his life and his family being unable to pay the equated monthly instalments (EMIs). This risk can be covered only by purchasing a life policy,” says Gaurav Gupta, founder and chief executive officer (CEO), MyLoanCare.in. Policies that cover critical illnesses, personal accident, etc. can at best be add-ons.
The home loan borrower should choose from one of these three policy types:
Group homeprotection coven This policy is also referred to as group credit shield. It is issued by life insurers and covers the borrower’s life. This is the policy usually pushed by lenders at borrowers (where no mis’selling is taking place). The lender is the beneficiary here: Any payout made goes towards settling the loan, and not to the borrowers nominee. In case the borrower dies, the loan is settled without the family having to do anything.’
However, it has quite a few disadvantages. The family doesn’t have any say in what to do with the money.
These are single-premium plans. Often, a borrower takes a loan for 20 years but repays it within seven. The policy lapses once the loan is closed and the premium for the balance years goes waste. If a borrower switches from one lender to another, then, too, the cover lapses.
Individual home protection coven This is the individual version of the policy described above. It is less commonly available than the group cover. “Here, the borrower, and not the lender, is the principal. Even if the borrower switches from one bank to another, his cover continues,” says Gupta. This type of policy may cost more than the group cover. Individual term coven This is the pure life cover one buys from a life insurer to guard one’s family against the risk of the breadwinner’s premature demise. Experts say a term plan bought independently, and not from the lender, after comparing premiums and features works best.
Here, the nominee receives the payout and can decide how to use the money. “If the spouse earns, she may be in a position to continue paying the EMI. She may then invest the money from the policy to achieve the other financial goals of the family,” says Adhil Shetty, CEO, Bankbazaar.
The annual premium imposes a lower burden. A group cover is a single-premium policy. Borrowers often have to take a second loan from the lei pay the large single premium. An borrower pre-pays the loan, he ( minate his term policy without of premium.
“Borrowers should supplen* term cover with a personal accide disability policy,” suggests Shetty A term plan has one downside, he “The borrower has to undergo n tests. This is not required in a cover,” says KapilMehta, co-foun< managing director, Secure Insurance Broker. Those who fail t the underwriting standards of cover may opt for a group cover.
Don’t fall prey to coercion
One unseemly aspect of taking a loan is that the lender often coerc borrower into buying an insurance i Sometimes, the lender’s represen even threatens that the loan will be held. “The regulators frown upon forced cross-selling,” says Mehta. lender insists, ask it to give you in w that loan approval is contingent o purchase of a policy. Most will bac Lenders announce special rates ing the festival season. Those rate offered only to borrowers who buy i icy. “Pay the 10 to 15-basis-point h interest rate but opt for a term policy chased independently due to the gr flexibility it offers,” says Gupta.
Constant or reducing cover?
The group covers sold by lenders both options. With a constant cover money left over after repaying the goes to the family. In a reducing c< the sum insured declines in line witl fall in principal outstanding as the is paid. This policy type is cheaper. But there is one nuance borrow should be aware of. The sum insi decreases in line with the original re ment schedule. If interest rate rises lender keeps the EMI unchanged increases the tenure. “Now, you re the principal at a slower pace, but cover falls in line with the original scl ule. The borrower risks becoming un insured,” says Deepesh Raghaw, four PersonalFinancePlan, a Securities Exchange Board of India-registe investment advisor. The constant cc thus provides greater safety.
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By SANJAY KUMAR SINGH By Business Standard | May 31, 2021