Home Loan Insurance vs Term Insurance: Which One to Choose?

Home Loan Insurance vs Term Insurance 

Both protect your home loan, but in very different ways. Home Loan Insurance ensures that your outstanding loan is repaid to the lender in case of your untimely death. In contrast, a Term Insurance policy offers broader protection, paying a lump sum to your family, which can be used to clear the mortgage, cover other financial needs, or invest for long-term goals.

Term insurance usually wins this war, offering higher cover at a lower premium, more customization, and useful riders like Critical Illness or Total Permanent Disability due to an accident.

Introduction

Buying a home is a huge milestone, but it also means years of EMIs. That’s why many lenders suggest home loan insurance to safeguard repayments. But is it better than a term plan? In this blog, we’ll compare home loan insurance vs term insurance to see which one offers stronger and more flexible protection.

Not sure which cover suits your loan and life goals best? At Ditto, we offer honest, jargon-free insurance advice that helps you understand what truly works for your budget and goals. Book a free call with our experts and get clarity before you buy.

What is Home Loan Insurance?

Home Loan Insurance, or Home Loan Protection Plan (HLPP), is a group credit life policy that protects the lender’s interest by covering your outstanding home loan in case you pass away during the loan tenure. The insurer pays the remaining loan amount directly to the bank, so your family doesn’t have to bear the EMI burden or risk losing the property.

Here’s how it works:

• Coverage equals your loan balance and reduces over time as you repay EMIs. For example, if you take a ₹50 lakh home loan, the HLPP cover might start at ₹50 lakh and gradually decrease as EMIs are paid and the outstanding principal reduces.
• The policy term usually matches your loan tenure, say 10–30 years.
• Premiums are often paid upfront or added to your loan outstanding payable via EMI. The single premium (plus GST) can be substantial, and if it’s clubbed with your loan, you’ll also end up paying interest on that amount.
• Optional riders may cover critical illness or total disability.

Note: Don’t confuse HLPP with home insurance (property cover). HLPP is the borrower's life cover. Home (property) insurance covers damage to the building/contents and is a separate product.

In India, several popular HLPPs illustrate this approach:

• LIC Group Credit Life Insurance offers flexible level, decreasing, or even increasing cover aligned with your loan schedule
• HDFC Life Group Credit Protect Plus allows joint or single life cover, with the lender paid first, and any balance going to your nominee
• ICICI Prudential’s Group Loan Secure lets you choose to reduce coverage starting after a few years
• Axis Max Life Group Credit Life Premier discloses a surrender value and prioritizes lender payments. 
• SBI Life RiNn Raksha is another example that supports multiple loan types and co-borrowers. All of these plans function under a single premium model.

HLPPs are convenient for borrowers who want a quick, no- or lenient-underwriting option, especially if they already have a term plan for broader family protection. However, these plans rarely provide living benefits such as critical illness payouts or temporary income replacement. Some limited “EMI protection” add-ons exist, but these often cover only 3–6 months of payments under strict conditions like involuntary job loss or continuous full-time employment.

Notes:

• Mortgage life insurance (Home Loan Protection Plan) isn’t mandatory under RBI or IRDAI rules; it’s optional and mainly offered by banks or HFCs to safeguard their loan portfolio.
  
  If a lender insists on “no policy, no loan,” remember, that’s not allowed. You have the right to choose or decline a home loan insurance plan. You can cite the NHB’s March 2025 directives mandating borrower consent and multiple insurer options for HFCs.
  
  If the pressure persists, file a complaint with the lender’s grievance redressal desk or escalate it to the regulator. In 2025, housing financiers were pulled up for insurance mis-selling.
• Early closure/balance transfer: Ask about the surrender value schedule for group credit life. Many single-premium life products return a surrender value if you close or transfer the loan early (exact value depends on the product).

What is Term Insurance?

Term Insurance provides a lump sum to your nominee in case of the policyholder’s death. Unlike home loan insurance, retail/individual term plans are not linked to a specific loan and offer flexibility in sum assured, policy, payment tenure, and add-on riders.

For example, 

• HDFC Life Click2Protect Supreme provides Accidental Death Benefit, Critical Illness cover, Terminal Illness Benefit, and wellness perks. 
• ICICI Prudential iProtect Smart Plus allows increases in coverage at significant life events
• Axis Max Life Smart Term Plan Plus offers women-focused perks and waiver of premium options.
•  Bajaj Allianz Life e-Touch II and Tata AIA Sampoorna Raksha Promise provide instant claim payout intimation, Life Stage Benefits, and flexibility to bolt on additional riders. 

Here’s how you can choose the best term plans in 2025.

Did You Know?

Term plans can also be assigned to the lender under Section 38 of the Insurance Act, effectively covering your home loan while keeping control of the remaining funds for your family. An assignment gives policy rights to the lender, while a nomination names your beneficiary.

The lender is paid first, and whatever remains goes to your nominee. Assignment of a term insurance plan always overrides nomination. The Deed of Assignment legally transfers policy rights to the lender as loan collateral and must be filed, acknowledged, and later revoked upon repayment of the loan.

Home Loan Insurance vs Term Insurance: Comparing Key Parameters

Note: Loan prepayment or foreclosure doesn’t automatically cancel the policy; refunds follow insurer formulas, and the cover can’t be transferred to a new loan or lender.

Home Loan Insurance vs Term Insurance — Real Examples

Borrower: 30-year-old male
Loan: ₹1 crore · Tenure: 20 years
Rate: 9% p.a.

Note: This is an illustrative example; actual rates will vary based on age, tenure, medical history, and riders opted.

Note: Financing the HLPP adds almost ₹3 lakh in interest cost over 20 years. Paying up front avoids interest, but still costs more than a term plan. Term plans let you pay premiums either once, regularly, or for a limited period. This helps you save on costs and invest the difference elsewhere.

Home Loan Insurance Vs Term Plan: Tax Benefits

Both HLPPs and term insurance policies offer tax benefits under Section 80C, which makes premiums eligible for deduction up to ₹1.5 lakh per financial year. Additionally, the payouts under both policies are tax-free under Section 10(10D).

From 22 September 2025, retail individual life insurance policies attract 0% GST, while group or credit-life policies continue to be taxed at around 18%, making them noticeably costlier.

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Conclusion

From a practical protection and cost perspective, term plans usually outperform home loan insurance. This makes them the more intelligent choice for long-term financial security. While HLPPs are convenient, they cannot be converted into term life insurance.

Consider term insurance as your core protection, with optional assignment to cover the loan. Unless there are underwriting concerns, such as medical or health issues, a home loan protection plan generally becomes the preferred or only viable option.

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