Rajkot-based Aakash Varadarajan immediately accepted an offer from his lender to buy insurance for his home loan.
He had read about these covers and easily agree when he got it without any documentation effort.
Like everyone else, he did not want burden to fall on his family if something unfortunate happened.
For a loan of Rs 20 lakhs (RS 2 million) from Axis Bank, Varadarajan was asked to pay Rs 31,630 at one time or during a single premium insurance plan.
These caps are called Mortgage Redemption schemes.
Those offered by banks falls under a group insurance scheme for borrowers of home or vehicle loan. Typically, the single premium long term plans or pure life cover.
The lender pays the premium to the insurer as soon as your loan will be sanctioned.
And adds the cost of your loan that you pay a lesser share with equated monthly installments.
Such caps offer a guaranteed amount worth the loan amount.
Premiums are higher for longer duration loans, such as those for housing.
Options
Later, Varadarajan learned he could have refused his lender and bought a cover separately, may be a small prize.
It is not compulsory to buy the cover from your lender.
You can buy a term plan itself.
Only you have to buy a regular long-term plan, not a group cover. If Varadarajan had chosen to buy a new cover for his loan, this 32-year-old would pay Rs 5,360 annually.
Says V. Srinivasan, chief financial officer of Bharti AXA Life Insurance, "A separate need not always work out cheaper."
For example, if Varadarajan pay Rs 31630 over 20 years, it would be a bit more than R 1,500 per year.
Single premium plans draw a bit cheaper than regular premium to them.
Suresh Agarwal, executive vice president at Kotak Mahindra Life Insurance, says the premium for a single group is determined, the average age banking partner lends to. Since there are groups across age, profession and so on, it is obliged to work out cheaper.
"It's also about facilitating documentation, ease off payment and get everything under one roof," says Srinivasan.
"Under the group system, you can choose between reducing and level of cover.
Reduction covers lower premium when principal is reduced, charge a lower premium.
A level of coverage remains stagnant even though the loan amount decreases, as a long term plan you purchase separately.
"If single premium that both insurers and borrowers prefer, we recommend reducing the covers, as it is linked to the outstanding (due) and is easy on the borrower's pockets," says Agarwal.
It starts lowering, once the recovery starts. Borrowers who have not purchased a loan covering can buy one within four to six months after the start of the recovery, but on certain conditions.
Varadarajan could also be associated with an existing term cover possible to cover his mortgage. Here he would have been obliged to give his insurance papers to the bank at the time of submission of the loan documents.
Reasons
It is clear that banks allow this if the term cover insured sum is equal to the loan amount.
"But we discourage borrowers from giving an existing insurance, especially if he / she is the sole bread winner in the house.
"One, because his / her family would also need financial help in case of his / her death.
"Two, as partners with insurance companies, we also have a sales target to meet," says a private banker.
"If you have more than a long term plan, you can choose that route.
It may happen that the existing coverage you want to associate with your home loan is a safe amount, which is less than your loan amount.
In that case, you can attach two policies are equivalent to the loan amount, Varadarajan has two life includes RS 10 lakhs (R 1 million) each.
Or, you can attach a cover and buy another corresponding to the difference between the insured amount and the loan and secure both.
But it is advisable to keep the term includes both these purposes separate.
Keep a cover for your family to fall back on in case of any eventuality and take a second cover to make sure your home loan.
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He had read about these covers and easily agree when he got it without any documentation effort.
Like everyone else, he did not want burden to fall on his family if something unfortunate happened.
For a loan of Rs 20 lakhs (RS 2 million) from Axis Bank, Varadarajan was asked to pay Rs 31,630 at one time or during a single premium insurance plan.
These caps are called Mortgage Redemption schemes.
Those offered by banks falls under a group insurance scheme for borrowers of home or vehicle loan. Typically, the single premium long term plans or pure life cover.
The lender pays the premium to the insurer as soon as your loan will be sanctioned.
And adds the cost of your loan that you pay a lesser share with equated monthly installments.
Such caps offer a guaranteed amount worth the loan amount.
Premiums are higher for longer duration loans, such as those for housing.
Options
Later, Varadarajan learned he could have refused his lender and bought a cover separately, may be a small prize.
It is not compulsory to buy the cover from your lender.
You can buy a term plan itself.
Only you have to buy a regular long-term plan, not a group cover. If Varadarajan had chosen to buy a new cover for his loan, this 32-year-old would pay Rs 5,360 annually.
Says V. Srinivasan, chief financial officer of Bharti AXA Life Insurance, "A separate need not always work out cheaper."
For example, if Varadarajan pay Rs 31630 over 20 years, it would be a bit more than R 1,500 per year.
Single premium plans draw a bit cheaper than regular premium to them.
Suresh Agarwal, executive vice president at Kotak Mahindra Life Insurance, says the premium for a single group is determined, the average age banking partner lends to. Since there are groups across age, profession and so on, it is obliged to work out cheaper.
"It's also about facilitating documentation, ease off payment and get everything under one roof," says Srinivasan.
"Under the group system, you can choose between reducing and level of cover.
Reduction covers lower premium when principal is reduced, charge a lower premium.
A level of coverage remains stagnant even though the loan amount decreases, as a long term plan you purchase separately.
"If single premium that both insurers and borrowers prefer, we recommend reducing the covers, as it is linked to the outstanding (due) and is easy on the borrower's pockets," says Agarwal.
It starts lowering, once the recovery starts. Borrowers who have not purchased a loan covering can buy one within four to six months after the start of the recovery, but on certain conditions.
Varadarajan could also be associated with an existing term cover possible to cover his mortgage. Here he would have been obliged to give his insurance papers to the bank at the time of submission of the loan documents.
Reasons
It is clear that banks allow this if the term cover insured sum is equal to the loan amount.
"But we discourage borrowers from giving an existing insurance, especially if he / she is the sole bread winner in the house.
"One, because his / her family would also need financial help in case of his / her death.
"Two, as partners with insurance companies, we also have a sales target to meet," says a private banker.
"If you have more than a long term plan, you can choose that route.
It may happen that the existing coverage you want to associate with your home loan is a safe amount, which is less than your loan amount.
In that case, you can attach two policies are equivalent to the loan amount, Varadarajan has two life includes RS 10 lakhs (R 1 million) each.
Or, you can attach a cover and buy another corresponding to the difference between the insured amount and the loan and secure both.
But it is advisable to keep the term includes both these purposes separate.
Keep a cover for your family to fall back on in case of any eventuality and take a second cover to make sure your home loan.
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