 "Home Loan, Loan, Home, House")
The National Housing Bank (NHB) has directed housing finance companies (HFCs) to address concerns about the mis-selling of insurance products bundled with home loans. According to media reports, HFCs must now obtain clear and separate consent from borrowers before selling them insurance products and offer at least two policy options.
Purchase not mandatory
Buying insurance with a home loan is not compulsory. “Borrowers are not obliged to buy insurance from their lender,” says Gaurav Mohta, chief marketing officer, Home First Finance Company.
The lender also cannot make the purchase of an insurance product a precondition for approving the loan. “Insurance Regulatory and Development Authority of India (IRDAI) prohibits forced bundling of insurance with loans,” says Adhil Shetty, chief executive officer, BankBazaar.com.
Mis-selling and its consequences
Lenders may push borrowers into buying policies without disclosing tenure, premium, and alternative products. “At times, borrowers are sold irrelevant policies that do not cover the risk (of the borrower passing away before the loan is repaid). Sometimes, the policy’s tenure is shorter than the loan tenure, leaving borrowers exposed,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi) registered investment adviser and founder, SahajMoney.com.
Such practices impose costs. “Borrowers end up buying coverage they do not require. They would be better off assigning their existing coverage or handling the risk on their own,” says Shilpa Arora, chief operating officer and co-founder, Insurance Samadhan.
Borrowers also end up paying interest on the insurance premium. “A borrower may take a home loan of ₹1 crore but get only ₹97 lakh, because ₹3 lakh may be deducted as the single premium for insurance. But interest would have to be paid on ₹1 crore,” says Arora.
Omitting health and other important details from the proposal form can lead to claim rejection.
Independent purchase is better
Lenders offer limited policy options. “The choice becomes restricted to the insurers the lender has partnered with,” says Kumar.
Home loan protection plans tend to be costlier than a term plan. “Insurance providers tend to take into account the full proposal form, medical evaluations, and offer regular premium payment options. Collectively, these factors help lower the cost,” says Arora.
Switching lenders may become difficult. “If the policy bundled with the home loan is a single premium policy, the borrower will not be able to port it if they switch lenders,” says Shetty.
Rising loan tenure, due to increase in interest rate, may leave the borrower’s family exposed (forcing the nominee to pay the balance if the borrower dies).
If pressurised to buy
Arora suggests asking lenders to provide documents proving that insurance purchase is mandatory. Borrowers can also disclose existing term covers or one they plan to buy. If the pressure continues, they may approach the banking ombudsman or consider other lenders.
What to look for in a policy
An insurance that covers a home loan must meet a few criteria. “Ensure that the coverage lasts for the entire loan tenure. The sum assured should align with or exceed the outstanding loan amount,” says Mohta.
Kumar says the policy should be a term life cover, with clear disclosure of premium, exclusions, and other key terms. Arora recommends buying a disability and critical illness rider to strengthen the base coverage.
Level, rather than reducing, term cover is preferable. “The price of term insurance has become quite reasonable, so it is better to buy a constant cover, which can support the family’s other financial needs also,” says Arora.
IF YOU HAVE BEEN MIS-SOLD A POLICY
* A 30-day free-look period is available to review the plan and cancel without penalties, if policyholder realises he has been mis-sold a policy
* File a complaint with the lender
* If the issue is not resolved within 30 days, approach the Insurance Ombudsman for redressal
* A complaint can be filed with the IRDAI Grievance Redressal Cell
* Borrowers can also file a complaint with the National Housing Bank, demanding a refund
