Term Insurance for Home Loan: Mandatory or Mis-sold?

If you’ve ever applied for a home loan, you’ve almost certainly been told that a term-insurance policy is “mandatory.” It isn’t. At Ditto, we’ve guided 300 + families through this exact scenario, cross-checking RBI circulars, loan booklets, and quotes from three of India’s biggest banks to separate fact from sales pitch. 

In the next three minutes, you’ll see the one RBI rule that actually matters (spoiler: term insurance is optional), why banks push bundled policies so hard, and the simple workaround that protects both your lender and your family without overpaying.

Let’s start by addressing a few basic questions - 

Does the RBI require you to buy a term insurance policy along with your home loan?

No, it does not.

There is no RBI circular, guideline, or notification that mandates borrowers to purchase a life or term insurance policy when availing a home loan.

In fact, the RBI has explicitly barred banks from bundling insurance products with home loans. As per its directive:

The bank shall not follow any restrictive practices of forcing a customer to either opt for products of a specific insurance company or link sale of such products to any banking product.

Do individual banks have policies that require life insurance with a home loan?

They cannot. Since RBI explicitly prohibits such linkage, any internal bank policy mandating life insurance would be non-compliant and legally invalid.

However, to clarify how this works in practice, we reviewed the official home loan terms and conditions issued by SBI, India’s largest bank. A plain reading confirms that life insurance is purely optional. The only mention of it appears with this disclaimer:

The premium for the optional Home Loan Life Insurance cover (if availed) will be added to the loan amount.

This clearly indicates that borrowers are under no obligation to purchase a bundled term plan, and loan approval cannot be made contingent on it.

So why do banks still insist on a term insurance with a home loan?

Simply because it’s extremely lucrative. Unlike regular term plans with annual premiums, these are typically single-premium policies, where you pay the entire premium upfront at the time of taking the loan. We checked with three large commercial banks for a quote on a ₹50 lakh loan with a 10-year tenure and a 35-year-old borrower. The quoted premiums ranged between ₹1.5 - 2 lakhs, all payable upfront. 

And remember, banks earn a hefty commission on this amount, which explains why agents often pressure borrowers to opt in, even though the product is entirely optional.

Should you opt out of a term plan when getting a home loan? 

There are two sides to this. A term plan is actually a very sensible financial safeguard when taking a home loan. If something were to happen to the borrower, the insurance payout can help the nominee clear the outstanding loan without distress. At Ditto, we’ve seen this firsthand. At least two families we’ve advised used term insurance proceeds to repay their home loans in full.

However, opting for a bundled plan from the bank is rarely in your best interest. These single-premium products are inflexible. Meaning, you don’t get to choose the coverage amount, tenure, or riders. They also ignore your broader financial responsibilities and protection needs. From a value standpoint, it’s a net loss. A far better approach is to buy a standalone term plan tailored to your income, liabilities, and family needs. It’ll be cheaper, more flexible, and serve you beyond just the home loan.

At Ditto, we’ve helped over 300 families choose term plans tailored to their financial goals and not the bank’s sales targets. If you’re considering a term plan, speak to one of our certified advisors for a free consultation and get recommendations that actually make sense for your family.

How to deal with banks that insist on a term insurance for a home loan?

Step 1: Ask for Written Confirmation

Request a dated, signed statement on the bank’s letterhead stating that your loan sanction will be withdrawn unless you purchase the specified insurance product. Also, ask them to cite the exact RBI circular or Master Direction that mandates such insurance. 

Step 2: Escalate Internally

Raise a formal complaint with the Branch Manager and the bank’s Nodal Officer, attaching any communication or messages from loan officers. This puts pressure on the bank to formally respond and helps you document the mis-selling attempt.

Step 3: Escalate to the RBI Ombudsman

If the bank does not resolve the issue or continues to coerce you, file a complaint through the RBI CMS portal.  Cite Clause 8(1)(m) of the Banking Ombudsman Scheme: “sale of third-party products in violation of guidelines.”

The problem with the complaint-escalation strategy is that it relies on the bank to self-correct, which rarely happens quickly, especially when their incentives are misaligned. If you're on a tight timeline, this route can be more frustrating than effective.

But there’s a cleaner workaround.

If you already have a term plan or plan to buy one for your broader financial goals, you can simply assign a portion of the cover to the bank. In the event of your demise, the insurer will pay the outstanding loan amount directly to the lender, and the rest (if any) goes to your nominee.

Here’s how to assign a term plan to your home loan provider

1. Choose and buy a term plan  preferably one tailored to your actual needs. (Our advisors at Ditto can help.)
2. Request an assignment form from the insurer once the policy is issued.
3. Fill out and sign the form, and submit it to your bank.
4. The bank approves and acknowledges the assignment. That’s it and you’re done.

Quick tip: Assigning your term plan doesn’t mean the entire payout goes to the bank. The lender will only receive the outstanding loan amount after accounting for what you've already repaid. The rest of the sum assured, if any, will go to your nominee. So your family still gets what they’re entitled to.

Why is “Assignment” better than buying a bundled policy from a bank:

We spoke to Shivangi, a certified insurance advisor at Ditto, who has personally helped over 10 families assign their term plans to cover home loans. Drawing from her experience, here’s why she believes assignment is far better than opting for a bundled policy from the bank:

1. You stay in control – You decide the sum assured, policy duration, insurer, and any add-ons.
2. It’s significantly cheaper – Standalone term plans cost far less than single-premium credit-life policies pushed by banks.
3. It’s more flexible – You’re not locked into a rigid plan designed only to protect the bank.
4. It protects your family too – After clearing the outstanding loan, the remaining payout still goes to your nominee.

Conclusion

RBI doesn’t force you to buy insurance, and banks can’t either. A standalone term plan assigned to the lender delivers the same loan protection at a fraction of the cost and still leaves the balance payout for your family. If you want personalised consultation to navigate insurance buying while choosing a home loan, you can quickly get on a call with a Ditto advisor for a free review.