Buying a home is one of life’s biggest milestones. However, in the excitement of receiving the loan approval letter, most people overlook a small checkbox that can end up costing them lakhs of rupees: the Single Premium Home Loan Insurance.
Banks often pitch this as a "peace of mind" feature, but if you aren't careful, you might end up paying double for it. Here is how the trap works and how you can avoid it.
What is Home Loan Insurance?
Essentially, it is a safety net. If something happens to the borrower (the person who took the loan), the insurance company pays off the remaining loan balance so the family doesn't lose their home. While the idea is good, the payment method is where the trap lies.
How the "Single Premium" Trap Works
When you take a home loan, the bank manager might say: "We have added an insurance cover of ₹1.5 Lakh to your loan to keep your family safe." It sounds helpful, right? Wrong. Here’s why:
- The Upfront Cost: Instead of asking you to pay a small amount every year, the bank takes the entire 20-year insurance cost (say, ₹1.5 Lakh) upfront.
- The Loan Addition: Since most people don't want to pay ₹1.5 Lakh out of pocket, the bank adds this amount to your home loan.
- The Interest Snowball: Now, your loan isn't just for your house; it’s for the house plus the insurance. You will now pay home loan interest (e.g., 9%) on that insurance premium for the next 20 years.
The Result: That ₹1.5 Lakh insurance policy could end up costing you over ₹3 Lakh by the time you finish your EMIs because of the compounded interest.
Three Reasons to Avoid Single Premium Plans
- You Pay Interest on Insurance: You are essentially taking a loan to buy insurance. This is financially one of the worst moves you can make.
- It’s Not "Portable": If you decide to move your home loan to another bank for a lower interest rate (Balance Transfer), your insurance policy usually stays with the old bank or gets cancelled. You lose the benefit.
- The Cover Shrinks: Most home loan insurance plans are "decreasing cover" plans. As you pay off your loan, the insurance value also goes down. Eventually, it becomes zero.
The Better Alternative: Term Insurance
If you want to protect your family, don't buy the bank's bundled "Home Loan Protection Plan." Instead, buy a Pure Term Insurance Plan.
- Fixed Cover: Unlike home loan insurance, a Term Plan's value doesn't decrease. If you have a ₹50 Lakh cover, your family gets ₹50 Lakh regardless of the loan balance.
- No Interest: You pay a small annual premium (e.g., ₹8,000 to ₹10,000). You aren't paying interest on this amount to the bank.
- Portable: It doesn't matter which bank you use for your loan; your Term Plan stays with you.
Conclusion
Insurance is mandatory for your peace of mind, but it shouldn't be a profit-making tool for the bank. Never add your insurance premium to your loan amount. If you must buy insurance from the bank, pay the premium separately from your savings, or better yet, get a separate Term Insurance policy.