Home loan insurance: Buy individual term cover for greater flexibility

Individual term plan stays with the borrower even if the loan is prepaid, refinanced or transferred, and payout goes directly to the nominee

Lifetime costs for online home loan insurance can be up to 70 per cent cheaper than offline loan insurance, according to a recent note from Policybazaar. But pricing is only the starting point. Home loan borrowers must also scrutinise how the cover works, who receives the payout, and what happens if they close or shift the loan.

 

Group vs individual term cover

 

Home loan insurance comes in two forms. First, lenders offer a group cover linked directly to the loan. Second, borrowers can buy a separate individual term plan for the same purpose.

 

Group covers offer convenience. “Lenders issue them at the loan stage, often with limited medical checks, and structure them as reducing covers,” says Venkatesh Naidu, director, Insurance Brokers Association of India (IBAI).

 

However, lenders often add the single premium to the principal loan amount. The borrower then pays interest on the insurance cost for years, which pushes the total outgo materially above what it appears on day one.

 

Group covers typically protect only the lender’s exposure, not the family’s broader protection needs. “They may also prove less efficient and portable if the borrower refinances or transfers the loan. They also offer limited scope for customisation on tenure, add-ons and payout structure,” says Naidu.

 

Individual term insurance is generally more cost-efficient per rupee of cover, especially for longer tenures. The cover typically stays level even as the loan reduces, which can leave the family with surplus protection if needed. The policy stays with the borrower even if the loan is prepaid, refinanced or shifted. The payout goes to the nominee, which gives the family more control.

 

“Group cover suits borrowers who prioritise convenience, don’t want medical check-ups, or have health issues,” says Arun Ramamurthy, co-founder, Staywell.Health.

 

Borrowers should choose it only if the pricing is competitive and they understand the true cost of funding the premium through the loan. “For most salaried and younger borrowers who seek value, flexibility and long-term protection independent of the lender, an individual term plan works better,” says Naidu.

 

Level cover or reducing cover?

 

Under a level cover, the sum assured remains the same. Under a reducing cover, it decreases in tandem with the loan outstanding. “Reducing cover costs less and tracks the loan balance more closely. Level covers, on the other hand, provide an additional financial cushion for the family,” says Ramamurthy.

 

A reducing cover makes sense if the borrower wants only loan protection, because the risk — the outstanding principal — reduces over time. However, the loan reduces, but the life risk does not. A level cover term plan keeps protection intact even after the loan burden reduces, which can support family income replacement and children’s goals.

 

Ensure reducing cover matches amortisation schedule

 

If the borrower chooses a reducing cover, they should check whether the cover reduction method mirrors their amortisation schedule rather than a generic table.

 

They should also check the frequency of reduction — monthly versus annual — since annual reductions can create gaps in coverage mid-year. Borrowers should confirm whether the cover adjusts or stays fixed if the loan tenure or equated monthly instalment (EMI) changes due to rate movements.

 

Borrowers should obtain a year-wise sum assured schedule and cross-check it with the loan amortisation table. “Review whether reductions occur monthly, yearly, or in slabs, and ensure there is no shortfall in coverage,” says Ramamurthy.

 

Who receives the payout?

 

In lender-tied group covers, the claim payout goes directly to the lender to settle the outstanding loan. In individual term plans, the payout goes to the nominee.

 

From a household protection standpoint, nominee payout usually works better. “It gives the family flexibility: close the loan immediately or use the funds for urgent needs and manage repayment in a planned way,” says Naidu.

 

Nominee payout is usually better, according to Ramamurthy, as it gives the family control over funds. “Borrowers can ensure this by not assigning the policy to the lender,” he says.

 

Single or regular premium?

 

Many borrowers opt for a single premium to cover loan liability. The premium is usually lower than a regular premium. “It offers peace of mind for the loan tenure by ensuring the liability is covered, and the family inherits an asset rather than the loan liability,” says Maneesh Mishra, chief product and marketing officer, Bandhan Life.

 

A regular premium plan spreads costs over time, offers better cash flow comfort, and can provide flexibility if the borrower prepays or refinances. The choice should come down to the borrower’s cash flow comfort and the chances of prepayment. “In most cases, regular premium payment works better for loan-linked term insurance. Term insurance premiums are relatively low, and annual or monthly payments are more affordable and flexible,” says Shilpa Arora, co-founder and chief operating officer, Insurance Samadhan.

 

When lenders add single premium to loan

 

Sometimes, lenders add the single premium to the loan amount. “Lenders cannot do so without the borrower’s consent. Lenders offer it as an option for borrowers who want coverage but lack additional funds,” says Maneesh Mishra. The borrower borrows the premium amount along with the loan and assigns the policy to the financial institution. The main benefit is convenience — no separate upfront payment.

 

The main drawback is that the borrower pays interest on the premium as well, which increases the overall cost of the loan. “This arrangement can suffer from poor disclosure, with borrowers signing documents without fully understanding that the loan finances the premium,” says Arora.

 

Borrowers should usually avoid this option, according to Arora. “They can instead buy a term insurance policy independently and assign it to the lender, or choose a regular-premium mortgage redemption policy where the sum assured reduces in line with the outstanding loan,” she says.

 

If you prepay, foreclose or transfer the loan

 

In loan-linked group insurance policies, if the borrower prepays, forecloses, or transfers the loan, they cease to be part of the group and the cover is cancelled. “In single-premium policies, insurers often allow a refund based on a time-left calculation or the surrender value in the contract,” says Sarvesh Kumar Mishra, chief third-party distribution officer, Generali Central Life Insurance.

 

Arora notes that, in practice, borrowers often need to follow up and make formal cancellation requests to receive the refund.

 

Regulations also allow the borrower to continue the cover as an individual life cover. “Otherwise, the borrower can surrender the policy and receive a surrender value depending on the year of foreclosure,” says Maneesh Mishra.

 

“Borrowers should read the portability and refund sections before signing,” says Sarvesh Kumar Mishra.

 

How to ensure good pricing

 

Borrowers can get good pricing by purchasing the policy online. “Besides a much lower premium, online loan insurance attracts zero per cent goods and services tax (GST) compared to 18 per cent for offline,” says Varun Agarwal, head of term insurance, Policybazaar.

 

To ensure fair pricing, borrowers must check whether the cover aligns exactly with the loan. The cover should not be inflated to push up the premium. Borrowers should also check whether the policy term matches the loan tenure, and whether riders such as disability and critical illness protect repayment ability.

 

Borrowers should compare covers across multiple insurers.

 

If the lender insists you buy its cover

 

Borrowers have free choice. According to the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority of India (IRDAI) guidelines, borrowers do not need to buy insurance from the same lender. “The lender cannot make it a requirement for giving the loan,” says Sarvesh Kumar Mishra.

 

If pressured, borrowers should ask the lender to give the condition in writing. “In many cases, the lender withdraws the demand once the borrower seeks written confirmation,” says Arora.

 

If the lender persists, borrowers can first raise the issue with the bank’s internal grievance team, then with the insurer, and, if needed, escalate the complaint to an ombudsman or regulator.

 

The writer is a Mumbai-based independent journalist.