Insurance is a method of mitigating risk. And the same logic applies to housing insurance as well. There are two aspects of housing insurance. First insurance is for housing loans and second insurance is for the house property per se.
A major deterrent for housing loans is the risk involved. Some people are reluctant to take a housing loan because of the risk involved. The loan amounts are large with tenures ranging from 5-30 years. There is a risk of not being able to repay the loan because of some unforeseen event happening in the life of the Borrower. The question that bothers some is, ‘what happens in case the sole earning member meets with a mishap? How would the housing loan get repaid by the surviving members of the family of the Borrower?’
At the same time, a Bank is also concerned about recovery of its dues in a simple a manner as possible, without having to go through the long and tedious process of enforcing the mortgage. With changing times, Banks have come out with new and innovative schemes. This has been complemented by an upsurge of insurance companies. They provide security for repayment of loan in case of untimely demise of the Borrower. Private players are entering the insurance market, and many new products have been launched. These give a wide variety of options to protect a home loan. Many products are flexible and suit the requirements of the Borrower.
The premium can be for pure risk cover or they may cover both risk and investment objectives. Many variants of the insurance schemes are available in the market depending on the requirements. The insurance cover can be for a pure insurance purpose or for insurance and investment. The premium payable and the returns vary accordingly.
Various optional add-ons can be combined, including critical illness cover, term rider cover etc., on payment of extra premiums. These optional benefits are to suit the specific needs of the individual.
The second aspect related to housing insurance pertains to insurance for the house property per se. This applies to constructed property. The insurance company covers risks of damage to property by earthquake, flood, lightening or other specified risks. In case of such damages, the insurance company makes good the loss suffered by the insured.
In case, one opts for the pure insurance product, only the risk is covered, i.e., the risk of non-payment due to demise of the Borrower. The premium is low in such a case. This is a term insurance. After the repayment of the loan, the Borrower does not get anything. The insurance cover comes to an end on completion of loan repayment.
In non-participating, pure risks cover plans, no benefits are payable on survival at the end of the policy term. The sum assured under the level term assurance plan is paid to the beneficiary. There are no maturity benefits on survival till maturity.
In case of insurance plus investment products, the product covers the risk and also promises a return on the expiry of the loan period. The Borrower gets back the sum assured along with the accumulated bonus on the expiry of the loan period. The premium payable is higher in such a case.
Some Banks give free or concessional cover. In some cases, the entire premium for the tenure is collected in advance on the basis of the rate applicable to the particular age group. The premium depends on the loan amount, sum assured, and the age of the Borrower. The sum assured is equal to the outstanding loan amount. In addition, in some cases, the property itself is insured for the loan amount to prevent any loss on account of damage to it.