Bundled Burden

Home loan insurance, or any mortgage redemption insurance plan, is inevitably part of a banker's sales pitch when extending sizable long-term credit, such as a home loan. These plans hedge the risk of loss in case the borrower dies during the loan term, especially an unsecured loan.

Abhijit Bose, head of retail assets and strategic alliance, Development Credit Bank, says the product is more important for the customer than the bank. "Banks have the collateral as security. Insurance is just a cushion. But, for the customer, a mortgage redemption plan is the sole protection."

However, you should know that, since the policy is a third-party product, the bank earns a commission for selling the plan. So, there might be situations when you don't require home loan insurance and it is still sold as matter of procedure.

At the heart of it, mortgage redemption insurance is like any other life insurance term plan. The difference is that, instead of paying your nominee, the insurer settles the claim with the bank to close the loan on the policyholder's behalf. In a term cover, the money would be given to your nominee or the legal heir, who would then have to settle the loan with the bank.

So does that mean that, if you have sufficient sum assured under a term cover, you do not need a mortgage redemption plan? The answer is yes. Term insurance covers can not only be a replacement for home loan insurance policies, but is a better option in some cases.