When taking a home loan, borrowers are often advised—or sometimes subtly pressured—to take an insurance policy that covers the loan in case of their untimely death. While this might seem like a responsible financial move, these bundled insurance products often come with hidden costs, limited flexibility, and unclear terms. Without a closer look, borrowers may end up paying significantly more for coverage that’s far less efficient than standalone alternatives like term insurance.
Many of these bank-sold policies, especially group loan protection plans, are structured to benefit the lender more than the borrower. They are typically single-premium policies with high upfront costs and limited portability. In contrast, a separate term insurance policy can offer broader coverage at a fraction of the cost—and it stays with you, not the bank. Understanding these differences empowers you to make smarter choices, ensuring both protection and value for money.
– Examining Insurance Options for Home Loans
The insurance discussed here covers the life component of the loan. Banks also bundle property insurance, which protects the physical home. These are separate products with different purposes and should be evaluated independently.
Take the example of a 30-year-old individual availing a ₹1 crore home loan for 20 years at an 8% annual interest rate. Two common insurance options are presented:
Though the coverage is identical, the distinction lies in cost, flexibility, and control. Loan protection insurance—typically bundled with home loans—is significantly more expensive and places control with the bank. Term plans, on the other hand, are more economical and provide the borrower full ownership of the policy.
– Why Banks Promote Loan Protection Insurance
Banks actively promote loan protection policies through bancassurance, a distribution model in which banks partner with insurance companies. This model allows banks to earn commissions for every policy sold, giving them a financial incentive to push costlier insurance products—even when better alternatives exist for the borrower.
– What Borrowers Should Consider
Financially savvy borrowers should:
Choose a pure term plan and assign it to the lender.
Understand that assignment is legally permitted under Section 38 of the Insurance Act, 1938.
Know that upon the borrower’s death, the lender recovers the outstanding loan, and any surplus from the insurance payout goes to the borrower’s heirs.
Evaluate whether loan-linked insurance is necessary at all—particularly if personal assets already exceed loan liabilities.
Banks may be reluctant to recommend this approach, as it undermines their commission-based revenue from insurance sales.
– Transferring a Home Loan? Avoid Unnecessary New Policies
When transferring a home loan from one bank to another, borrowers are often pressured into buying new insurance policies. Two strategies can help avoid redundant costs:
– Option 1: Convert Existing Cover
Request the insurer to convert the group loan cover into an individual policy.
Assign this new individual policy to the new lender.
– Option 2: Surrender and Reassign
Surrender the current loan-linked policy.
Use the surrender value to buy a new term insurance plan.
Assign the new term plan to the new bank.
The second option is generally more cost-effective, particularly for those who already hold a term plan that can simply be reassigned.
Final Word
Home loan-linked insurance is not compulsory. Before accepting any insurance product offered by a lender, borrowers should carefully assess the costs, compare alternatives, and determine who retains control of the policy. In most cases, a standalone term insurance policy offers greater value, more flexibility, and meets the lender’s security requirements without imposing excessive financial burdens.