Congratulations! if you have reached here that means that either you have already bought a house on loan or plan to do so. Having a home to call your own is always a nice feeling isn’t it? For most of us it happens mostly once in a life time. If you have multiple home to call your own a big congratulations again. This article focuses on the life insurance trap that comes bundled with the home loan product. There are other kinds of insurance also bundled with the home loan product but that is out of scope of this article. I have briefly covered smaller aspect of it at the end of this article where I put in my advice. The views / opinion expressed on this page is based on the interpretation and observations of the author. By reading further you absolve the author of any responsibility of loss of any kind.
You are buying a dream home and do not have enough money to pay for it. However you can afford it on EMI so you approach a bank. The bank sales person asks you to buy the bundled life insurance product with the loan product. A good sales person who is not even authorized to sell an insurance product weaves a gloomy story where a certain Mr X’s home had to be auctioned and their family vacated after X’s un-timely death.
You are now convinced that you do not want to leave a big debt behind in case something happens your says yes OR if you say no you are arm twisted into saying yes by pushing this bundled insurance product as a must have requirement.
Let’s hear a story which is adapted from a real life story of someone I know. Names of characters have been changed on purpose to conceal their identity. However the profile is such that many of you may connect to them.
This story revolves around Mr. Amit Malhotra and his wife Mrs. Shobha Malhotra. Amit works at a multi-national company as a salaried employee and Shobha his wife is a home maker. There are just two people in the family and have a nuclear family set up. After a year of marriage both decide to buy their first house in NOIDA.
STEP 1 : House Hunting – Finalizing the Property
- Amit and Shobha search for properties and after many weekends of hunting finally make up their mind on a property that suits their budget and location.
- The best part was property was getting handed over in next 2 months. They could not refuse the temptation of moving into their new house so soon.
- Sales person Suresh at the builder’s office was very helpful. He helped them fill in the forms and as suggested they decided to buy the property on joint name to save 1% stamp duty at the time of registration.
- Amit pays builder the maximum amount that he could afford from his own funds hands over all the required documents.
.STEP 2.1 : Arranging the Home Loan
- Amit now seeks advise from Suresh about loan options available and interest rates prevalent.
- Suresh introduces Amit to Jaggu who represents a leading bank for loan requirement.
- Jaggu again comes across as a friendly sales person who promises lowest of interest rates and even assures the loan disbursement within a week as the property is pre-approved from his bank. Jaggu also promises to return the processing fees from his own commission through a post dated cheque if the application is processed and approved.
- Amit thinks he is a smart buyer and decides to check for Jaggu’s claim by talking to other lenders outside. He feels this shall give him bigger bargaining power.
- Two days later just as Amit was walking out of a bank after checking their home loan rates(the 5th that he had checked). He receives a follow-up call from Jaggu, since by this time Amit had found out that Jaggu’s rate was indeed competitive he says yes to Jaggu’s proposal.
- Jaggu promises to visit Amit’s current residence the same day in evening. He also makes Amit make a note of all the documents that he would need.
STEP 2.2 : Arranging the Home LoanPart 2- Setting up the Trap
- Jaggu as promised promptly makes a visit to Amit’s rented accommodation with the forms then makes the final sales presentation on the home loan product that he was selling. Amit had already decided on taking loan through Jaggu hence he was just nodding even when he was not paying attention.
- Jaggu while talking about the home loan product brings out the topic of life insurance. He rightly suggests that it is important to protect a loan in case of death of the earning member to protect loved ones from loosing their home.
- Jaggu tells them that the home loan product has a bundled life insurance which has a one time payment of Rs. 200000/- for the amount of loan that Amit was taking. Jaggu also tells him the amount of Rs 200000/- is really cheap as it covers home loan to the extent of outstanding balance. As home loan continues to be repaid the outstanding amount keeps decreasing hence the liability to insurance company keeps decreasing.
- Amit had already stretched financially while making his down payment for the house hence expresses his inability to pay additional premium for this life cover.
- Jaggu assures Amit “Do not worry Sir this amount will be added to your home loan amount and you will pay it monthly clubbed with your regular EMI”
- Amit suggests he would not like to take this bundled insurance product, Jaggu tells him it is a requirement and bank will approve his loan only if he takes this bundled insurance. Jaggu also assures Amit this is a standard process followed by all banks and it is in best interest of both Amit and the bank. This product shall save Shobha of any trouble should anything happen to Amit. Jaggu also narrates a tragic story of one his clients who’s wife had to be forcefully evicted by the bank after untimely death of his client in a road accident.
- Amit decides to check Jaggu’s claim by calling a friend who had recently taken a loan. His friend tells him he also had to take bundled life insurance along with his loan. Amit was now convinced this is a standard practice and by this time he had also gone little emotional hence says yes to the proposal.
- Jaggu pulls out two forms one for the loan application and another for life insurance and helps Amit fill up the form. Jaggu collects all the required documents and photograph. Jaggu also informs as per the current scheme of bank there are no medical tests for loan up-to 1 crore and suggests Amit not to mention he was a smoker on the form. He also suggested that insurance underwriters look for ways to increase premium hence mentioning will trigger medical tests and since you do not look enjoying the perfect BMI you will see increase in premium even if all tests come out normal. Jaggu also reduced Amit’s weight by 5 kilograms to make sure he looks within normal limit.
- Amit by this time was sure that Jaggu is acting on his behalf and is taking care of his interest. Amit started considering Jaggu his best friend he had only met today.
- After few days of processing Jaggu promptly arranges for a tri partite agreement between buyer, seller and the bank signed and the loan is disbursed.
- After few months property is registered on joint name of Amit and Shobha.
- They move into their new house and will continue to pay EMI on loan for next 20 years– ALL PARTIES HAPPY
Well Ending for sure but only for the time being. Read what happens next when they meet a financial adviser 5 years later.
STEP 3 : Happy Ending!
Amit meets a Financial Advisor
- Five years later Amit met a financial adviser Shekhar. He requested Shekhar to review all his financial portfolio including his home loan.
- Amit did not even have his home loan buyer’s agreement. He thought it was the sanction letter and annual interest statement is all that a customer gets. On Shekhar’s advise when Amit followed up with bank he was given the copy of home loan agreement and other papers related to the bundled life insurance that he had bought.
- On analysis of the papers Shekhar found out that and informed Amit that:
- No where in the agreement it was written that loan is mandatory. I was not mandatory and it cannot be mandatory as per the guidelines.
- Amit was sold insurance by a person who was not even authorized legally to sell insurance hence whatever advise Jaggu gave as an insurance adviser was as a sales person of home loan.
- The interest rates and tenure the loan is much different from what Amit had originally signed for. He was not only paying much above market rate for the loan amount but also for the insurance since he had decided to club it with the loan.
- Sum assured on the insurance was decreasing each year as per the original schedule and was much less than that of his current principal outstanding. Amit’s insurance was stopping 3 years much before the loan end date. Had anything happened to Amit, Shobha would have had to arrange aditional fund to keep her house.
- Amit had taken a single premium insurance product which was non transferable and non refundable that is in case Amit decides to shift his bank loan to some other bank offering cheaper rates he will lose money he paid for insurance. A before term pre-payment of loan would not have made return of premium.
- Since Amit had taken a joint property with his wife the life insurance policy was also on join name. The insurance premium was increased to cover two life. However on careful analysis it was found that there was a clause that life will be covered only if both are earning. Shobha as you know by this time was a home maker hence she was never covered in the plan even after paying for it.
- Shekhar showed Amit that his decision to take insurance on EMI has made insurance very costly. In fact costlier by many times. He should have taken a regular term insurance from an insurance company and could have paid premium yearly or even monthly. He would have also had greater flexibility as he could have used the same insurance plan to protect other things in life that his family depend on.
So what was the end, Amit still continues to pay his EMi however he has shifted the loan to some other bank where he has cheaper rates. He has also bought separate term plan from an insurance company to cover his home loan.
If you get caught in a similar situation keep the following advise in mind:
- Covering your debts through a life insurance product is a must as it saves your dependants from trouble should anything happen to you. A general rule is to cover your life with minimum of 10 times your current income. Add all outstanding loan amount to this income. A regular term insurance will not only cover your home loan but also cover for other expenses of your dependent.
- A stand alone term insurance product is always flexible and cheaper compared to a bundled life insurance product. If you take additional loan to cover for life insurance you will end up paying many times the premium of any stand alone term insurance product. A regular term insurance with a monthly or yearly premium will always be cheaper compared to a bundled insurance product taken on EMIs.
- You may opt for a term insurance product that reduces on sum assured as your home loan principal. Any agent with decent mathematical ability will be able to design a combination plan for you that reduces sum assured as your principal reduces. This again will be cheaper than any bundled insurance.
- You need life insurance only for the earning member who is paying EMI. Taking a joint life insurance just because the home is bought on joint name is meaningless.
- Always remember as a customer you should be always truthful while filing in application form. You may end up paying some extra premium for your medical condition but you will have a peace of mind that the claim will not be rejected on that count.
- Be aware of life insurance products that says no medical tests necessary. In these cases medical history assessment may be done at the time of claim and in case of disparity with your application form, the claim may be rejected.
- If you have already bought such product make sure you ask for the policy document and as per IRDA guidelines you can return back the policy within 15 days of receiving the policy. Rule of 15 days is not from the day of issue of policy but 15 days from the time you receive your policy. If you face resistance complain to IRDA and banking ombudsman. Sometimes simply marking a mail to them solves the problem. Additionally you can make a public post on bank’s Facebook page. No one wants a public review that is negative. Make sure to note name of all bank officials you meet, you will need to name people in your complaints. Keep the correspondence in writing as far as possible.
- When ever you approach a home loan agent or a bank official ask them if an insurance product is bundled with the product. If you get yes as an answer tell them you are looking for a product that is plain home loan. You can tell them that it is illegal and you know your rights. You can also send them link on IRDA that clearly says IRDA is not happy with this bundling. Here is the link. You can also ask them that you have heard selling insurance needs a separate license and if the agent has that. You can also tell the agent you would like to verify the license number on IRDA website before talking about insurance aspect.
- Some agents are more persistent and they may bring in another bank official to convince you. At this point ask them to give it in writing and tell them you will consult IRDA and banking ombudsman about this.
- Trust me even if you have to walk out you can be assured to get a follow-up call asking you to take the loan with the insurance. If you keep repeating your original line they will finally say we will waive this off just for you. Actually they do not waive this off it is never built in at first place. Make sure to get this in writing as well. At least ask them to email you that this is a pure home loan product and does not contain any bundled insurance. Any agent whose intentions are not good fears a well learnt customer.
- Never rely on agents and bank officials to read documents on your behalf. Make sure you read each and every line before you sign. If you are busy call them for signature when you are free. By being careful at this stage you will save lot of undue harassment later.
- Remember to keep track of your insurance portfolio, any change in premium or interest rate means change in principle outstanding each year or change in tenure. Make sure you have insurance cover for loan protection.
- In case of bundled products, f you are looking for tax exemption for the premium paid under section 80-C remember you will only get tax exemption if you pay it from your sources. if you take loan to pay premium you will not be eligible for deductions on the premium amount.