Quick Overview

Protecting your home loan with life cover is absolutely recommended, but how you choose to do it (personal term plan vs bank’s home loan protection) makes a massive difference in cost, flexibility, and how much your family actually gets. Unlike bank-linked home loan insurance, a term plan gives a higher cover amount, lower premiums, and more flexibility.

Once the excitement of buying a new home with the help of a loan subsides, you can’t help but worry about EMIs. One probing question is what would happen to your home and its EMIs if something were to happen to you? This is where term insurance tied to your home loan can provide much-needed security. 

In this article, we explore why term insurance for home loans matters, what it offers, and how it compares with loan-linked home-loan insurance or protector plans.

Need help choosing the right term plan for your home loan? Talk to a Ditto expert for free guidance.

Difference Between Home Loan Insurance and Home Loan

A home loan is simply the amount you borrow from a lender to finance the purchase of your property. Home loan insurance, on the other hand, is a policy that covers the outstanding loan balance if the borrower passes away. 

However, home loan insurance isn’t always the most suitable or cost-effective choice, especially if you already have sufficient term insurance that can serve the same purpose. You can assign your personal term plan to the lender. In the event of your demise, the lender has priority to recover the outstanding loan amount, and any remaining proceeds are then paid to your nominees.

How Does Term Insurance for Home Loans Work?

    • You select a sum assured (the amount of coverage you want), which should be enough to cover outstanding loans, future financial needs, family expenses, and other expenses. If you need help, you can use our term insurance coverage calculator or book a free consultation call.
    • You pay regular premiums (monthly, yearly, or as per policy terms).
    • Suppose you pass away during the policy term. In that case, the policy pays a lump sum (or staggered benefits, depending on the plan) to the beneficiaries.

Tax Benefits of Home Loan and Term Insurance

Combining a home loan and a term insurance policy can provide significant tax benefits.

    • Under Section 80C (Old regime) of the Income Tax Act, you can claim a deduction (up to ₹1.5 lakh per financial year) on the premiums paid for term insurance + principal repayment of the home loan.
    • Under Section 24(b), interest paid on self-occupied home loans is deductible (up to ₹2 lakh annual limit).
    • For first-time homebuyers (with property whose stamp value doesn’t exceed ₹45 lakhs), there may be additional interest deduction under Section 80EEA, making home-loan + term insurance more tax-efficient.

Together, these deductions reduce taxable income and ease the financial burden of both loan repayment and insurance premiums.

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Insurance Types That Protect Your Home Loan

01

Regular Personal Term Insurance Plan

You buy a regular term plan with sufficient cover (say ₹1-2 crore), where you own the policy, and your family is the nominee.

02

Bank’s Home Loan Protection Plan (HLPP)

This is also called mortgage-reducing term insurance. Here, your sum assured will be roughly equal to the loan amount, and the cover reduces each year as you pay EMIs. The bank is usually the assignee/primary beneficiary, and it gets the money first to settle the loan.

03

Bank’s Group Credit Life / Group Home Loan Cover

Bank/NBFC has a group insurance tie-up with an insurer. Here, all borrowers are added as members to this “master policy”. 

Note: You get a certificate of insurance, not a full, standalone policy.

Although this has simpler onboarding and less strict medicals, the premiums can still be higher than a good retail term plan for the same cover period.

Premiums and Cost Structures in Insurance

For the same coverage, say, per ₹1 lakh, personal term plans tend to be significantly cheaper, particularly for younger individuals, non-smokers, and those in good health. Moreover, the premiums can be paid annually or monthly. 

If the policy was taken solely to cover a loan and you close the loan early, you can discontinue the policy; alternatively, you may choose to retain it to meet other long-term protection goals.

In contrast, HLPPs or group credit life plans often involve a single premium covering the entire loan tenure, such as 15-20 years. Many lenders add this one-time premium to the loan amount, so you also end up paying interest on it, making the effective cost considerably higher. 

Even in limited-pay or regular-pay versions, the premium per ₹1 lakh of coverage is typically higher than that of a standard online term plan for the same age and tenure. 

Why Choose Ditto for Term Insurance?

At Ditto, we’ve assisted over 8,00,000 customers with choosing the right insurance policy. Why customers like Aaron below love us:

Term Insurance for Home Loans
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You can book a FREE consultation. Slots are running out, so make sure you book a call now!

Conclusion

Term insurance for a home loan is one of the simplest and most effective ways to protect your family from inheriting debt and financial stress. Unlike bank-offered home loan insurance, a standalone term insurance plan gives you better flexibility, more exhaustive coverage, and long-term value.

By choosing the correct sum assured and aligning it with your loan and your family’s needs, you can secure both your home and your loved ones’ future with confidence.

Frequently Asked Questions

Why do banks recommend home loan insurance?

Their main reason is to ensure that, if something unfortunate happens to you, the outstanding loan amount can still be repaid. This protects the lender from financial risk and also ensures that your family does not inherit the burden of an unpaid loan.

Can banks force you to buy home loan insurance?

No. As per IRDAI and RBI regulations, banks and insurers cannot force you to buy home loan insurance. They may recommend it, but the final choice is entirely yours.

What are the benefits of buying term insurance for a home loan?

It protects your family from loan burden while providing coverage for your financial dependents at lower premiums and higher flexibility.

Can I use my existing term insurance for a home loan?

Yes. If you already have a term plan (e.g., ₹2 crore cover), banks usually accept it. They may ask you to assign the policy to them. In this case, while you remain the policy owner, the bank is paid the outstanding loan amount first (it becomes the primary beneficiary), and the remaining amount (if any) is paid to your nominees.

What tenure should I choose for the term plan if I’m buying it mainly for my home loan?”

When selecting the tenure, avoid basing your decision solely on the loan duration. While your home loan may have a 20-year tenure, your family’s financial dependence, such as the needs of your spouse or children, may continue for 25-30 years or more. Therefore, it’s wiser not to match your term plan only to the loan period. Instead, choose a term plan that covers both the full loan tenure and the years until you expect to achieve true financial independence.

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