When one applies for a loan, he/she is almost immediately offered an insurance policy to cover it. Insurance companies tie up with lenders to offer this product to a borrower, to prevent the family from being burdened in case of an eventuality.
These are called Mortgage Redemption Schemes or Loan Protection Covers. The ones offered by banks typically fall under a group insurance scheme for borrowers of housing or vehicle loans. Mostly, these are single premium term plans. The lender pays the premium to the insurance company as soon as a borrower is sanctioned a loan. And, adds the cost to the borrower's loan cost, paid in small parts with the equated monthly instalments (EMIs). Such covers offer a sum assured worth the loan amount.
This product is very helpful. However, there can be other options in place of Mortgage Redemption covers.
Says Mumbai-based certified financial planner Pankaj Mathpal, "Buying a (separate) term cover to protect a loan would work out better, even in terms of cost."
Sample this: HDFC
Life Insurance's Home Loan Protection Plan would charge a premium of Rs 122,900 a year for a Rs 50 lakh housing loan. Of course, a group plan would cost lower. Compare this with a term assurance plan worth Rs 50 lakh from HDFC Life's stable and it will cost Rs 21,950 yearly. If one buys an online term plan, HDFC Life's Click2Protect, the premiums are even lower at Rs 5,100 a year. (Source: HDFC Life website)
While mortgage redemption covers are mostly single-premium, experts say the premium is linked to the loan amount due and should get lower in sync with the liability, many times it might not. This is a clear loss for the borrowers. If banks do take the entire premium in one go, then also borrowers stand to lose as most end up repaying the loan in seven to eight years.
Agrees certified financial planner Suresh Sadagopan from Mumbai, "A loan protection cover exists only till the loan does, while a separate term plan will be there for longer and provide extra insurance," he says. While a separate term plan works for someone who can buy an extra one or who already has a term plan, it also works for someone who cannot take on an extra expense in terms of the premium cost.
If a borrower has a term cover already and does not want more, he/she could ask the bank to link an existing one, provided it covers the entire loan amount. The borrower could also link more than one term plan to match the loan amount.
Mostly, though, banks do not agree to it. They advise keeping cover for loan liability separate from the one meant for family needs. And, tell borrowers to buy a separate one than link an existing one. Therefore, instead of shopping for one, borrowers find it easy to sign one more document among the reams of loan papers and buy a cover from the lender.
AS Narayanan, chief distribution officer of Bajaj Allianz Life Insurance, finds merit in buying a cover from the lender. "It is convenient in terms of not having to run around to buy one and it is available with the loan. Hence, in case of an eventuality the borrower will not need to claim from a separate entity while keeping the bank informed. If bought from the bank, the borrower's family may also be helped with the claims process. Importantly, it is no hassle, as the payment is linked to loan repayment and the cover ends with the loan," he explains.