ATM :: Take a fixed cover term plan to protect your home loan

Priya Nair | Mumbai June 11, 2014 Last Updated at 15:04 IST | Business Standard

This will ensure that even if you take top-up loan you don’t need to take additional insurance


If you have an existing home loan and are in need for funds, an easy way to raise money is to opt for a top-up loan. Since it is a secured loan and you are already servicing it, your bank or housing finance company will not refuse you a top-up loan. But what if the lender insists that you take a loan protection insurance? Should you take it for the entire outstanding amount? Or only for the additional loan amount? Or should you take one at all?

V N Kulkarni, counsellor with debt counselling centre Abhay, says that taking a loan protection insurance is voluntary and nobody can force the borrower to take insurance. However, it is in the interest of the borrower to take insurance. “If, for instance, the borrower meets with an accident and dies then the family could be saddled with a huge liability. So, an insurance to cover the loan is useful,” he says.

Gaurav Gupta, CEO of My Loan Care, an online loan advisory platform, also says that there is no such requirement that loan has to be taken with insurance. While the big banks or housing finance companies may not insist on such insurance, the smaller ones may do in order to protect their margins.

“Small banks and NBFCs may offer rates similar to the big players, but they may bundle additional products like insurance along with the loan to cover their higher cost of funds,” he says.

Many lenders may insist that you take a credit protection plan. Some companies offer an option of a decreasing term cover over the tenure of the policy. This is because the sum assured is linked to the loan outstanding and as the loan gets repaid the sum assured also decreases. But in this case if you take a top-up loan the lender may insist that you take another insurance policy to make up for the gap. To avoid this it is advisable to take a pure term plan, where the sum assured remains the same.

In fact, if you have an existing term insurance policy, then there is no need to take additional insurance, points out Kulkarni.

“You have to ensure that the insurance covers the entire liability. Banks put in insurance as a condition to sanction loans because they want recovery to be smooth. They want to avoid getting into Sarfaesi and selling the property. It is easier to recover the dues if there is insurance,” he says.

Lenders usually insist on a loan protection insurance for home loan since they are long-term and big ticket size loans. In case of personal loans, usually banks don’t insist on insurance since the amounts are smaller, typically Rs 50,000-3 lakh.

But if you take a second personal loan (which is more common than a top-up), then the lender may insist on increasing the insurance cover, says Gupta.

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