Taking a home loan is a big financial commitment — often lasting 15 to 20 years. To protect this long-term liability, many borrowers opt for home loan insurance, which ensures that the loan is repaid even if something unfortunate happens to the borrower.
However, one common confusion arises: “Why doesn’t my home loan insurance cover the entire loan amount?”
Let’s understand why this mismatch happens — and what it really means.
What Is Home Loan Insurance?
Home loan insurance (also known as loan protection plan or mortgage insurance) is designed to repay your outstanding loan in case of the borrower’s death, disability, or critical illness during the loan tenure.
The premium is usually paid once at the beginning or through EMIs along with your home loan.
Why Your Insurance Cover May Not Match Your Loan Amount
There are a few logical reasons behind this gap between your loan amount and insurance coverage:
1. Declining Cover Structure
Most home loan insurance policies work on a reducing balance basis — meaning the cover amount decreases each year as your loan balance reduces.
So while your initial coverage matches your loan, it gradually falls as you repay the EMIs.
📘 Example:
If your home loan is ₹40 lakh, your insurance might cover ₹40 lakh in the first year, ₹37 lakh in the second, ₹33 lakh in the third, and so on.
2. Different Interest Rate Assumptions
Insurance companies calculate coverage assuming a certain interest rate and loan repayment schedule.
If your actual rate or tenure changes, the insurance coverage may no longer align perfectly with the outstanding loan.
3. Partial Coverage Options
Some borrowers choose partial or limited cover to lower their premium costs. In such cases, the insurance will cover only a part of the loan amount (say 70–80%) rather than the full value.
4. Joint Borrowers and Shared Liability
For joint home loans, insurance can be split between co-borrowers. If one borrower is insured for a smaller share, the total cover may appear lower than the combined loan amount.
5. Exclusions or Claim Limitations
Certain policies exclude specific causes of death, illnesses, or claim periods. In such cases, the actual amount settled may differ from your outstanding balance.
How to Ensure Sufficient Home Loan Protection
Check whether your policy offers reducing or level cover.
Review the interest rate assumption used for coverage calculation.
Opt for a joint cover if multiple borrowers share the loan.
Update your insurer if you change your EMI schedule or prepay part of your loan.
Read the exclusions carefully to avoid surprises during claim time.
Final Thoughts
Your home loan insurance is a financial safety net — but it’s crucial to understand its structure. A mismatch between your loan and cover doesn’t always mean a problem; it’s often just how the policy is designed.
To stay fully protected, review your coverage every few years and adjust it as your financial situation changes.
After all, your home deserves both strong walls and strong financial security.
FAQs
Q1. Can I increase my home loan insurance cover later?
Yes, some insurers allow top-up covers or new policies if your loan balance or tenure changes.
Q2. Is home loan insurance mandatory?
No, it’s not compulsory, but it’s strongly recommended for financial protection.
Q3. What happens if I prepay my home loan early?
Your insurance coverage may continue for the original tenure unless you request an adjustment or refund.
Q4. Can I transfer my home loan insurance if I switch lenders?
In most cases, you’ll need to buy a new policy when transferring the loan.
Published on : 7th November
Published by : SMITA
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