When you take a home loan, you want to make sure that the loan is repaid even in your absence. After all, you want your family to inherit your house (and not your liabilities). This is a reason why you purchase life insurance. Many times, even banks try to convince/persuade/force you to purchased insurance plans at the time of loan sanctions.
Here are 4 kinds of insurance plans that you can consider purchasing at the time of taking a home loan.
- Term Life Insurance: The insurance company pays your nominee if you are not around. In your absence, your family may find it difficult to repay the home loan. A term life plan can turn out to be quite useful.
- Critical Illness Insurance plan: A critical Illness can not only result in heavy medical expenses but also result in loss of job. This may limit your ability to repay the loan. A critical illness insurance plan can be useful in such cases. Such a plan can be even more useful if you do not have adequate health cover or emergency reserves. For more on critical illness plans, refer to this post.
- Personal Accident Insurance Plan: An accident can result in disability. A disability can be temporary or permanent disability. The disability could a partial or total. Depending on the type of disability and your nature of occupation, your ability to generate income may get restricted. If you have purchased a personal accident cover, a lumpsum or monthly pay-out from the insurance company can be very useful in such cases. For more on personal accident plans, refer to this post.
- Property Insurance: Such an insurance ensures that you are compensated for the damages to the house structure due to fire, flood, lightning, earthquake or other natural calamities. For more on property insurance, refer to this post.
From the bank’s perspective, when they are providing you loans, they SHOULD want to ensure that you (your family) can repay the loan irrespective of any unfortunate event that you may encounter. For this reason, they may ask you to purchase a term plan, a critical illness plan or a personal accident plan. Another intent is to ensure that the quality of their security is not compromised. For this reason, they may ask you to purchase property insurance.
Sounds just about right. I see merit in going for such covers when you are taking a big loan. However, do bankers do it the right way? Not always.
I have discussed disadvantages of purchasing insurance from banks at the time of taking loans in this post. In the aforesaid post, I limited the discussion to cost-effectiveness and lack of flexibility in the plans sold by the banks. Such plans (also referred to as Home Loan Protection Plans or HLPP) are super-expensive and difficult to get out of. For more on HLPPs, please refer to this post.
HLPPs are expensive because banks earn hefty commissions on sale of such products. Moreover, underwriting is quite generous (expensive) since you are a captive client. In another post on HLPPs, I talked about how the product structure of HLPPs can be a problem for borrowers. A borrower was sold reducing cover HLPP (life cover went down as per original loan schedule). Unfortunately, the interest rates moved upwards and at the time of demise of the borrower, the principal outstanding was way higher than the life cover. Clearly, the family of the borrower was in a serious mess.
As a borrower, you may be okay with an expensive plan if it gives you the comfort that your family wouldn’t have to struggle to own your dream house after you are gone.
You (Your Family) May Be in Big Trouble if You Trust Your Bank Blindly
From your perspective, you (and your family) gets complete coverage if you purchase term plan, critical illness plan and a personal accident plan. Let’s not talk about property insurance or health insurance at the moment. It shouldn’t be any different from bank’s perspective either. Should it? Not really. The fact is banks don’t care. The banks are anyways quite safe. If you (your family) can’t repay the loan, they can always sell your house and recover their funds. The banks keep enough margin to recover their loans. With this confidence, they can afford to put borrower’s interest on the backburner and focus aggressively on the commissions, sales and fee targets.
In an earlier post, I discussed about ICICI Home Safe Plus product, which, in my opinion, is an absolute sham of a product. You might feel that this product will settle the loan in the event of the death of the borrower. No, that’s not how this product works. This product makes the payment only if the demise is due to a critical illness or due an accident. Bizarre, isn’t it? If the borrower dies due to a natural illness (which is not a critical illness), there shall be no pay-out. In such a case, what will the borrower’s family do? Despite purchasing a home insurance product, the family is left to fend for itself.
The question I have for ICICI Bank and ICICI Lombard: What were you thinking when you structured such a product? All I can say is that the best interests of the borrower were not in mind.
Another Case
A few days back, I got a call from another victim (borrower’s wife) of bank’s mis-selling. I would hide details about the bank and the product since I have heard only one side of the story (and have not been able to ascertain facts of the case as yet). The borrower took a home loan of about Rs 90 lacs. Along with the loan, he was sold the following 3 products:
- Property insurance (Fair enough)
- A standalone personal accident plan
- A group personal accident plan
As you can see, stupidity comes in all permutations and combinations.
The borrower passed away due to cancer a few months back. As expected, the insurer didn’t entertain since there was no critical illness cover or pure life cover. As the borrower’s wife told me, her husband believed that the death due to any reason was covered under the insurance plans he purchased. After all, he had paid ~Rs 2 lacs upfront as insurance premium. Sadly, he was wrong.
Who is at fault? Clearly, the borrower is at fault. He should have dug deeper into what he was purchasing.
What about the bank and the insurance company? They can always shrug off the responsibility saying that they gave the borrower all the options but the borrower chose to purchase limited coverage. How does a borrower’s family argue against that in a court of law? However, why, then, would the borrower think that he was covered? Why would he not opt for plain vanilla life cover? Clearly, something is amiss. To me, it feels the borrower either did not realize what he was purchasing. Or he was told something and sold something else. It is difficult for me to absolve bankers in this case.
What Should You Do?
- Do not purchase any insurance plan from the bank at the time of availing loan. It will be quite expensive.
- Do not trust what the bankers tell that you are buying. Read everything before signing the dotted line.
- Identify areas of insurance shortage yourself. Do not let the banks do it for you. I have listed above the different types of insurance plans that could be useful.
- If you assess that there is an insurance shortfall, you can purchase an insurance plan from outside.
- Know your rights. Banks cannot force you to purchase bundled products i.e. insurance along with loan. You can say NO. Typically, purchase of property insurance is part of the loan agreement. Therefore, you can’t avoid that. However, there is no compulsion to purchase the cover from insurer of bank’s choice or the insurance company promoted by the bank. You can buy insurance plans from outside. If required, you can get the plan assigned to the bank.