Home loan protection: what to buy and what to decline

A home loan is, for most households, the largest financial obligation they will ever take on, and it outlives the borrower. Protecting it is sensible. Protecting it through the product offered at the loan desk is often not.

Two different things get called loan insurance

Property insurance covers the asset - the building - against fire, natural catastrophe and allied perils. Lenders generally require it, because the security backing the loan needs to survive. Insure at reinstatement cost, which is what it would take to rebuild, not at the loan amount and not at the market price of the flat.

Credit life or loan protection insurance covers the borrower, paying off the outstanding balance if they die during the tenure. This is the one that is optional, frequently presented as though it is not, and worth thinking about carefully.

How bundled credit life is usually structured

It is typically a single-premium policy for the full tenure, financed into the loan itself. That means you pay interest on the premium for the entire life of the loan, which can nearly double its effective cost on a long tenure.

The sum assured usually reduces in line with the outstanding balance, so cover falls as the loan amortises. The policy is generally assigned to the lender, so the payout clears the loan and the family receives nothing beyond that. And it is tied to this loan - refinance to another lender and it does not follow you.

A reducing cover assigned to the lender pays off a debt. A level term policy pays your family, who can then decide what to do with it.

The usual better option

A separate term life policy, sized to cover the loan alongside your family's other needs, paid annually rather than as a financed single premium. It is generally cheaper. It stays with you through refinancing. The sum assured stays level, so as the loan reduces the surplus becomes protection for the family rather than disappearing.

And the nominee is your family, who can choose whether to clear the loan or keep the money working, rather than the lender taking it automatically.

If you already hold adequate term cover, factor the loan into it at the next review rather than buying a separate product. The point is that the total cover should exceed the total liability, not that each liability needs its own policy.

What to ask at the loan desk

Is the sanction conditional on buying this policy? Almost always it is not, and asking directly changes the conversation. If it is presented as mandatory, ask for that in writing.

Is the premium being financed into the loan, and what does it cost in total interest over the tenure? Is the cover level or reducing? Is it assigned to the lender? Is it portable if I refinance? Those five questions usually resolve the decision.

The one that is genuinely worth having

Property insurance on the home itself, at proper reinstatement value, with contents cover added. It is inexpensive relative to what it protects, it is required anyway, and it is the cover that responds to the far more likely event of a fire or a flood rather than a death.