Home loans and education loans are treated as good loans by many individuals. Though they are cheaper than personal loans, they tend to have a longer repayment tenure. No wonder, the lenders want to be on the safe side. In addition to the regular due-diligence, borrowers are generally asked to buy life insurance policies. It is in the interest of the borrower to buy life cover. If you have taken a home loan and you die before repaying it, then the bank has the right to recover the money by selling the house. Such a situation can be avoided by taking life insurance.
However, many times, borrowers are offered life insurance on a group insurance platform that pays the outstanding loan in case the borrower dies before repaying the loan. To enhance the protection, now borrowers also have the option to supplement the life cover with an accidental disability and critical illness cover.
Should borrowers go for such covers on group life platform or should they stick to their good old standalone covers?
Before we get into the specifics, let’s understand how these products- popularly known as Mortgage Reducing Term Insurance (MRTI) - work. The sum assured offered by this product mimics the loan outstanding in the tenure of the loan. As you repay your equated monthly installments (EMI), the loan outstanding keeps on falling and so does the sum assured. The idea is to pay up the loan in case of death of the borrower.
The master policy is issued by the life insurer to the lending institution like your bank. The lending institution then enrols borrowers after following the due process. These products are generally single premium products. Many times the single premium amount is added to the loan amount and EMI accounts for it. To make it easier, the insurer and the lender agree on simplified underwriting (more of this, later) and the enrolment process. Though everything looks promising, not all experts recommend buying these products.
The coverage
The sum assured falls as time passes in case of MRTI. The sum assured is just enough to pay off the loan. MRTI does not hand over the sum assured to the survivors in case of death of the insured person. Instead the money is paid to the lender, so that your loan does not become a non-performing asset. The sole focus is on paying off the loan. For example, ICICI Loan Protect Plus offered by ICICI Prudential Life Insurance offers to pay the loan outstanding in case of death off the borrower. The sum assured falls in line with the loan outstanding. In case of moratorium of five or seven years, the sum assured remains constant and once the loan repayment starts, the sum assured also falls. This product also offer the option to keep the sum assured constant. However most traditional products on group life platform do not offer this option.
Compare an MRTI product with a pure term life insurance product that you buy directly from the market, and you would realise that the cover remains constant through the term in the case of the latter. In case of a death, the insurer pays the sum assured on term life insurance products. Some of this money can be used to pay off the loan and rest can be used for any other purpose, by the nominees.
“Earlier borrowers used to buy only life insurance covers. However, in case of accidental disability and critical illness, the earning ability of the borrower gets affected. But the loans do not get repaid in such situations. That makes it a case for purchasing critical illness cover and accident disability cover,” says Deepak Yohannan, founder and CEO of MyInsuranceClub.com.
If you buy critical illness cover or accidental disability cover on a group platform, the insurer offers to pay the loan outstanding as per the policy conditions in case the borrower suffers from critical illness or accidental disability. For example, ‘Health Kavach’, a group insurance offering by DHFL Pramerica Life Insurance, offers to pay the sum assured in case of the insured suffers from accidental death, specified critical illness, accidental permanent total or partial disability or loss of limbs. Here the insured either can choose a flat cover or choose to link the sum assured with his loan outstanding.
If buy you a traditional critical illness cover or personal accident cover for yourself, you are paid the sum assured. You may use it for repayment of loan or to pay for your treatment or for both. “Purchasing critical illness standalone cover works in favour of insured individual as the insurer pays the sum assured to insured person. He can decide how to use the proceeds. However you do not have a choice when you have bought a loan insurance as the money goes to the lender,” says Abhishek Bondia, co-founder and principal officer, SecureNow.
Price
Comparing a standalone product and a product on a group platform may not be the best thing to do, say many experts. “The sum assured and the terms of the products differ widely along with the scope of the product, which leads to an apple to orange comparison,” says an actuary with a leading reinsurance company.
For a 35 year old male, ICICI Pru Loan Protect Plus with a sum assured of Rs 40 lakh (home loan reducing cover) for 10 years will charge Rs 1.21 lakh towards single premium excluding taxes, for coverage including death benefit, accelerated critical illness, and total and permanent disability.
According to Policybazar, if the same person goes for level cover using term life insurance plan (I-protect smart) for Rs 40 lakh with a term of 10 years he would pay Rs 9,899 towards premium per year, including cover for accidental death and cover against critical illness.
For a home loan of Rs 50 lakh for a tenure of five years, the single premium for a 30-year-old would be Rs.24,000 (excluding taxes) and for a 45-year-old would be Rs 1,23,000 (excluding taxes) in the case of Health Kavach.
A point to note is that from a cost point of view, the covers are cheaper when you go on standalone basis.
Ease of purchase
The flipside is that you could find it difficult to buy a critical illness cover or even term life insurance product on standalone basis at an advanced age. The battery of medical tests and long form filling may be put off a few buyers.
Group insurance, however, is all about ease of transaction. Since the insurer knows that the borrower’s primary aim is to obtain the loan and not obtaining insurance, there is less scope for rejecting applications. That makes the insurer offer liberal methods of purchasing the product. Most of these products may have one-pager enrollment forms. Instead of medical tests, the insurer may insist on good health declaration or health questionnaire.
Each of these Master Policies however come with No Medical Limit (NML) or Free Cover Limit. It is a certain threshold of the sum assured, above which the insurer insists on medical tests.
“The NML would vary depending on the age, group category and type of financial institution. For example the NML limit would be low for higher ages. The limit may also change depending on the type of financial institution. For any sum assured that is higher than the NML limit, medicals will be mandatory,” says Anshuman Verma, Chief Marketing and Digital Officer, DHFL Pramerica Life Insurance.
But watch out for this. “Easy enrollment works in two ways. First, the borrower who generally signs up, is in a hurry to get the loan and the insurance. He does not get to see the policy conditions in details as the master policy is issued to the lender”, says Yohannan. He adds, though, that “the positive side is many borrowers who would otherwise may not buy the insurance at all on standalone basis, would get some coverage on the group platform if they sign up for one.” Although, to reiterate, this coverage is primarily for the use of repaying the loan and not for the policy holder’s treatment or sustenance.
Standalone covers are better he insists, but it is better to have something than having zero coverage.
Portability
This factor should not be ignored and goes against products on a group platforms. These products are mutually negotiated agreements between the insurer and the lender and hence if you chose to transfer your loan to other lenders, then the cover does not get transferred. In that case, the insurance need to be bought again. And the single premium you had paid, in this case, at the time of taking the loan, goes away. These covers expire with the expiry of the loan. Especially in the health covers, one cannot extend them. A point to note that one needs more health covers when the age rises.
This problem does not arise in case of the standalone product. The coverage continues even if you move from one lender to another. You can also port your policy from one insurer to another in the case of health insurance plans. You can also keep renewing your covers even after completely repaying your loan.
Verdict
“If you are young and can obtain an insurance product after the due diligence, it is worth the effort and money to buy on standalone basis. But if you do not have the time and willingness to take that extra effort, or you do not have the patience to go through the underwriting process, you may buy it on group insurance platform,” says Abhishek Bondia.
Convenience comes at a cost. When you take a loan, do review your insurance covers, even if your lender may not be insisting on purchasing the insurance. Repayment of loans, even when you are not around, will ensure that your family can peacefully enjoy the assets you built using the loan.
When you go for a large loan, do go for adequate insurance coverage using standalone products. If you are running short of time or looking for some ease of purchase, then you may consider products on a group platform. They are definitely better than going without insurance.