What is Home Loan Insurance and its Tax Implication?
By Anupama Deshpande | July 11, 2019

When you go to any lender for getting a home loan, the lender may insist you to buy home loan insurance too. It is good to buy a home loan insurance but still it is not a mandatory to buy it.

Home Loan Insurance is an insurance which covers the cost (EMIs) of your home loan in case of your unforeseen demise. This is taken by home loan borrowers. The insurance plan is taken in name of the home loan borrower himself. The cover is limited to loan amount availed by the borrower. There are several home loan protection plans available in the market to serve this purpose. One can buy the insurance policy either along with the home loan or at a later date.

For your better understanding, we are detailing below as to What is Home Loan Insurance and its Tax Implication?

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In case of unforeseen death of the borrower, the liability to pay off the loan will come on the shoulders of the surviving family members. If the borrower has taken a home loan insurance cover then it will help family member meet the financial liability of home loan.

To buy a home loan insurance plan is the sole discretion of the borrower and nobody can pressurise him to get it.

Home Loan insurance cover can be bought in 2 ways:

(1) You can buy it from any Life Insurance Company

(2) You can buy it from the lender

If you opt for buying it from the lender, it will add the insurance premium to the home loan amount so the total loan liability will increase but at the same time the borrower does not have to worry about payment of premium out of his own pocket.

Also read List of Documents You Should Get Back After Closing Home Loan

If the borrower has bought the insurance from Life Insurance Company and he himself is paying the premium then he can claim the tax deduction under Section 80C of the Income Tax Act.

Whereas, if his policy premium is funded by the lender then the borrower cannot claim the tax deduction under Section 80C of the Income Tax Act as it has been paid by the lender and is part of the home loan which will be paid through equated monthly instalments (EMIs). Since the insurance policy is a third-party product, it is not a product of the home loan lender such as bank. The bank only earns a commission for selling the plan. The major benefit of buying it from the lender is that in case of the demise of the borrower, the insurance company automatically settles the loan amount with the lender.

As an example, suppose a borrower avails a home loan of Rs 40 lakhs and the single premium for the 15-year insurance cover, which is taken from the lender, is Rs 60,000. Then the home loan insurance premium will be added to the original home loan and the home loan will now become Rs 40.70 lakhs and the EMIs for Rs 40.70 lakhs will be calculated instead of original loan amount of Rs 40 lakhs as the premium of home loan insurance is included in the home loan.

It is not necessary to buy home loan insurance cover from the lender. The borrower can buy it from any other life insurance company also if their terms are more favourable. One should do proper research in the market and buy the insurance plan after that from the right insurer.