Amit (name changed) approached HDFC for a home loan. The lender sanctioned the home loan and cross-sold a home insurance policy (HDFC Home Suraksha Plus). The home loan amount is Rs 29 lacs, and the single insurance premium is ~95,000. The premium for the insurance plan is quite high. Amit can’t pay such a high premium.
No problem. HDFC has a solution. Another loan equal to the insurance premium account. You can call this Insurance Premium Funding Loan (IPF Loan). The insurance policy is from HDFC Ergo (sister concern of HDFC). Thus, no cash outflow from Amit’s pocket. And Amit can repay the loan in EMIs spreading over 15 years (same as his home loan).
After 5 years, Amit prepays the home loan and approaches the bank for release of his documents. The bank declines to release the papers since the IPF loan is still not repaid. Is the lender justified in not releasing the papers? What do you think?
Note: As per RBI regulations, the lenders are not permitted to make purchase of insurance as a precondition to loan sanction, but we know how things work, especially against those borrowers who are not completely aware of the regulations. Since I can’t be sure what transpired between HDFC and Amit, I must give the benefit of doubt to the lender. Amit must have found merit in the product.
Is HDFC Justified in Not Releasing the Documents?
The lender’s action is legally correct. There are two loans. Home loan and the Insurance Premium Funding (IPF) Loan. And the IPF loan letter clearly states that the loan is secured by mortgage on the property. Therefore, unless the IPF loan is fully repaid, the lender won’t and shouldn’t release the documents. Completely justified. However, is HDFC right?
Let’s first dig a little deeper.
Home Loan Amount: ~29 lacs. Home loan tenure: 15 years
HDFC Home Suraksha Plus has 2 components:
- Home Insurance
- Personal Accident/Critical Illness/Loss of job insurance
#1 Home Insurance
HDFC Ergo Home Suraksha Plus covers the borrower’s house against
- Fire and allied perils, Earthquake, and terrorism (both building and contents) AND
- Burglary, housebreaking and Theft (contents)
Fair enough. If the house or building is damaged, the borrower receives a financial blow, and the repairs can cost a lot of money. A home insurance plan will help here. Moreover, if the damage is beyond repair, the borrower may have lower incentive in paying back the loan. Such a plan helps safeguard interest of the lender (as all the payouts are routed through the lender).
#2 Personal Accident/Critical Illness and Loss of Job
Any accidental disability or a critical illness can compromise your earning ability. The treatment will also cost a lot. This affects your home loan repayment ability. If you don’t repay the loan, the bank can repossess your house. Not a happy situation to be in. This can also happen if you lose your job (not including voluntary unemployment or retirement)
How do you manage this risk? By buying personal accident, critical illness, and loss of job insurance.
Thus, if the borrower bought this plan on HDFC’s suggestion, the lender gave good advice.
Note: In personal Accident plans and critical illness insurance plans, the insured events are not as objective as a term life insurance plan. Even health insurance plans are more objective. If you want to understand the intricacies of such plans, suggest you go through these posts on Personal Accident Insurance and Critical Illness Insurance plans.
Where Is HDFC Wrong?
As a borrower, which event poses the biggest risk of non-payment? The unequivocal answer would be the demise of the borrower.
And as bizarre as it may sound, the HDFC Ergo Suraksha Plus does not cover against demise. It covers demise only if it happens in an accident (accidental death). If the demise happens due to a natural cause, the insurer won’t pay anything. In the event of borrower demise, if the loan is not repaid, the bank will come and repossess the house. The family of the borrower will be left high and dry. But why would the lender not include life insurance?
Because HDFC Ergo is a general insurer. Can’t sell plain vanilla life insurance. Hence, don’t blame HDFC Ergo for this.
HDFC (lender) could have tied up with HDFC Life and cross-sold a term life insurance policy. Possible reasons why this didn’t happen (and these are conjectures):
- The lender thought that accidental disability and critical illness pose greater risk of non-payment than demise. The banks don’t think. They sell.
- HDFC (lender) is rewarded better for cross-selling the policy from HDFC Ergo.
- HDFC could have sold both plans (from both HDFC Ergo and HDFC Life) but the higher cost and multiple plans could have repelled the borrower. The bank loses both insurance commission and the loan client.
By the way, HDFC Ergo Suraksha Plus is not one of its kind. We wrote about ICICI Lombard Home Safe Plus many years ago.
Another Question Mark on the Intent
The insurance coverage is only for 5 years. Why? The home loan is for 15 years, right?
Does HDFC think things can go south for the borrower only in the first five years? What if the something (insured event) happens to the borrower after 5 years?
Zilch. Nothing. The insurance contract is over. You or your family gets nothing.
By the way, HDFC probably has a perfect defense for this. Most borrowers tend to prepay loans (as Amit did). Thus, by keeping the tenure short, the lender kept the premium low for the borrower. A 15-year insurance cover would have cost thrice as much.
Editor’s Note: Lenders should probably rethink how such loan and insurance products are structured. The HDFC Ergo insurance product is for 5 years only. However, the HDFC IPF loan account has a 15-year tenure (same as the home loan tenure). First, this may cause the borrowers (or their families) to mistakenly assume that they are covered by this insurance product for 15 years, when this is not really the case. The second issue is that during preclosure of the home loan, they feel that they are being harassed to prepay the IPF loan for an insurance product that has already expired (or no longer required).
What Should You Do?
HDFC Ergo Home Suraksha Plus is not a complete product. In fact, no such plan is complete without a plain vanilla life cover. However, the structure, coverage and financing are NOT completely thoughtless either. It does not provide coverage against a few risks. You cannot trust the banks/lenders and the experience suggests the sales teams can be quite ruthless, unscrupulous, and insensitive. Don’t expect HDFC to be any different.
Caveat Emptor. Buyer beware. You must do your homework.
- Re-assess risks to your financial lives. Such risks can be demise, poor health, hospitalization, disability etc.
- Purchase suitable insurance products accordingly. And you can get insurance directly bypassing the bank. Please note expensive and incomplete coverage through products such as HDFC Ergo Home Suraksha Plus is better than no coverage at all.
- Ask the right questions. Read the terms and conditions of any product (loan/insurance/investments) before signing the dotted line. Saves a lot of heartburn later.
- Know your rights. Bundling of products is not permitted. Things like “If you don’t buy insurance plan, we won’t sanction loan” is illegal. Stand your ground and ask the lender to give such statements in writing.
However, if you are baffled by the difference in tenure of insurance coverage (5 years) and IPF loan (15 years) OR why the lender won’t return documents even after the repayment of home loan, take a deep breath. There is nothing wrong. Very simple. You took a loan and paid the insurance premium. Once this happens, the loan tenure has no relation to the insurance coverage tenure. The IPF loan tenure could have been 1 year, 3 years, 5 years, 10 years, or 25 years. Makes no difference. Since the loan is secured by mortgage, you won’t get the property papers until you close the IPF loan too.