Several home loan seekers have this misconception that home loan insurance is a mandatory element of every home loan. However, this is far from the truth, and as much as it is advisable to purchase home loan protection plans, they are not mandatory.
You will be able to make a reliable decision regarding the purchase of insurance after fully comprehending what it means.
What is home loan insurance?
Home insurance in Ontario is a protection plan that offers to cover the outstanding loan amount in case the borrower dies during the loan repayment tenure. This reduces the risk of loss by ensuring the repayment of home loan even after the demise of the borrower. In this case, the cover offered by the policy reduces each year. It is because the borrower pays off his/her loan and it lapses after the complete repayment of the loan.
Factors associated with Home loan Insurance
There are some critical factors associated with home loan insurance that you should be aware of:
- Only the home loan is covered under the plan and not the home.
- A premium is required to be paid to purchase the policy.
- The following factors influence the amount of insurance premium:
- Age: Older people are charged with a higher premium
- Amount: The amount of loan is directly proportional to the amount of premium
- Tenure: Premium is more when tenure is longer.
- Medical Record: Premium is low for healthy individuals
- An applicant can get the premium funded by the lender in case he/she is not in a position to pay for it. The premium amount will then be added to the loan amount.
- A borrowed could claim a tax deduction for the home loan insurance premium under Section 80 C of the Income Tax Act if he/she paid it himself/herself. In case it is funded by the lender, then it’ll be paid off through home loan EMI making it impossible to claim tax deductions for the same.
- Commonly, most home loan policies offer a single premium option in place of regular annual payments. This implies that his insurance cover will remain unaffected in case he decides to prepay the loan amount. However, issues may arise in case he decides to get his loan refinanced from another lender.
- The increase in repayment tenure by the borrower will cause a reduction in the cover of his loan due. The increased repayment period will result in a slow decline in the outstanding amount.
- Foreclosure of the loan can cause partial or complete loss of premium.
- The home loan insurance only covers the outstanding loan amount, which means the insurance amount will decrease as the years pass by due to repayment of the loan.
- Under the term-insurance plan, the insurance provider will give the insurance amount to the applicant’s family member who’ll then be responsible for settling the loan.
- The borrower can also purchase a home loan insurance that covers other factors as well that makes it hard for the borrower to pay home loan EMI. These include critical illness, disability or loss of job in addition to the death of the borrower. You’ll have to pay an extra premium for the same.
Also read: Money Saving Tips on Home Loan Using a Loan Prepayment Calculator
Some banks mandate the purchase of home loan insurance since they are paid a commission to sell this third-party product. Hence, in some cases, you’ll be forced to purchase a home loan protection plan, even if you don’t need it. Is It Mandatory to Take Insurance for a Home Loan