You finally got your Home Loan approved. You are excited to buy your dream flat.
But the bank manager pushes a paper in front of you:
"Sir, you must sign this ₹1 Lakh Insurance Plan (Home Loan Protection Plan). It is mandatory to secure the loan."
STOP.
He is not telling you the whole truth.
According to the RBI and IRDAI, buying insurance from the lender is NOT mandatory.
While banks can require you to have coverage as per their internal policy, they cannot force you to buy their overpriced product. Here is why you should refuse it and buy a Term Plan instead.
Disclaimer: Securing a large liability is smart financial planning. The goal is to get better coverage for less money, not to skip insurance entirely.
Why a Term Plan is 50% Cheaper and Better
1. The "Single Premium" Trap (The 8.5% Interest Hit)
Home Loan Protection Plans (HLPP), also called Mortgage Redemption Insurance (MRI), usually ask for a Single Premium upfront (e.g., ₹1 Lakh).
🏦 The Bank's Dirty Trick: "Funding"
You say: "I don't have ₹1 Lakh cash right now."
The Manager says: "No problem! We will add it to your loan amount."
The Consequence: You are now paying 8.5%+ interest on that insurance premium for 20 years!
That ₹1 Lakh premium will actually cost you ₹2.5 Lakhs+ by the end of the loan tenure. You are paying interest on insurance!
2. HLPP vs. Term Insurance (The Showdown)
Let’s compare a standard Bank HLPP against a pure Term Insurance Plan.
| Feature | Home Loan Protection (HLPP) | Pure Term Insurance |
|---|---|---|
| Coverage Amount | Decreasing Cover. (As you pay off the loan, the insurance cover drops to zero). | Constant Cover. (Stays the same even if you pay off the loan). |
| Portability | Stuck. If you transfer your loan to another bank, this policy often lapses or must be surrendered at a loss. | Portable. It is tied to YOU, not the bank. Switch loans freely. |
| Cost Structure | Expensive Single Premium (+ Interest). | Cheap Annual Payments (Easy on pocket). |
3. What Happens If You Pre-close the Loan?
Most Indians try to pay off their home loan in 10-12 years instead of 20.
If you have HLPP: The cover ends when the loan ends. Getting a refund on the unused premium is difficult, and the "Surrender Value" calculation usually gives you back peanuts.
If you have Term Plan: You continue the policy. Now that the loan is paid, that ₹50 Lakhs cover becomes a pure inheritance gift for your family.
4. But Can They Reject My Loan?
Banks cannot legally reject a loan just because you refused their insurance product. That is called "Tie-in arrangement" and is illegal.
However, they can insist that you have insurance.
The Winning Script:
Tell them: "I agree insurance is important. I already have a Term Insurance policy of ₹1 Crore which covers this loan liability. I can assign this policy to the bank if required."
Usually, showing proof of an existing Term Policy is enough to satisfy their credit policy.
5. Case Study: The Cost Difference
- Scenario: 30-year-old male, ₹50 Lakh Home Loan.
- Bank HLPP Cost: Approx ₹1.5 Lakhs (Single Premium) + Interest = ~₹3.5 Lakhs Total Cost.
- Term Plan Cost: Approx ₹6,000 - ₹8,000 per year.
The Strategy: Buy a Term Plan. Invest the difference in a Mutual Fund (SIP). You will likely earn enough to pay off a chunk of the loan itself!
Be Smart, Not Scared
A Home Loan is a big commitment. Securing it is important.
But don't let the bank dictate how you secure it.
Action Plan: If you are applying for a loan, firmly say "NO" to the bundled insurance. Buy a separate Term Plan online for half the price and enjoy constant coverage that protects your family, not just the bank.
Helpful Resources:
RBI FAQs: Home Loans & Insurance Guidelines
HDFC Life: Compare Term Plans
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