Home purchase is an important life event. So much so that, just as one insures health, life and motor vehicles, a home purchase should trigger an almost immediate purchase of term insurance for financial protection. But there are two ways in which this can be achieved. Home loan term insurance or simple term insurance. We detail the difference between the two and show why simple term insurance should be a preferred insurance option.
Home loan insurance
Home loan insurance is a product that covers the liability to the bank from a home loan and is not a mandatory product but an option presented to the home loan customer.
After one gets approval for a home loan from any bank, most likely, the sales officer or a third-party agent would follow up with this question: “Would you be interested in a home loan insurance as well?” The sales officer would go on to explain the product, the pricing, its features and also mention that the premium amount can be added to the outstanding loan and repaid as one repays the loan. An unsuspecting homeowner in the heat of the moment, and who until then has been transacting in lakhs or crores, would not pay much heed to the additional ₹1 lakh or so piled on to the home loan. This is especially considering the protection it offers the family. But to understand why better options exist, one must understand the product as well, beyond mere pricing comparison.
As the name indicates, this is an insurance to cover the home loan liability to the bank. Under an adverse eventuality, the insurer would pay the bank the outstanding loan amount. This would clear the surviving family of the loan liability, and the insurance as well as the home loan would be closed.
It is clear that while the homeowner pays insurance premiums (which are comparatively higher) to protect the asset, the bank gets the benefit of hassle-free liability clearance while not sharing the cost of premiums. The bank also benefits from the higher loan outstanding (inclusive of the home loan insurance premium) on which it earns an interest as well.
During the home loan repayment, it is possible that the homeowner can shop around for banks and secure even more favourable terms from another bank. If the loan is transferred, the loan insurance is nullified and not ported to the new bank, nullifying the premiums paid to date.
While home loan insurance does protect the nominee, simple term insurance can offer much more.
Term insurance
The first difference is in pricing. Considering a sum assured of ₹1 crore for a 35-year-old, a term insurance would cost around ₹8,000- ₹9,000 per year. If a policy period of 20 years is considered, the single premium would cost ₹80,000-₹90,000 if discounted to the current day at 8 per cent discount rate. A home loan term insurance offered by the bank or a third party would cost 10-20 per cent more at ₹1 lakh-₹1.2 lakhs. The factors of age, place of residence, lifestyle habits, medical conditions can influence the price as well.
Also, principal is repaid in home loans, slowly at first and significantly in later years. For an average home loan, despite a 20-year period of repayment, it would not be unusual to be repaid in 8-10 years. In such cases the price difference is even starker. While a term insurance continues to deliver ₹1 crore sum assured consistently, a home loan term insurance covers the bank liability which is decreasing and may not exist in 8-10 years and does so at 10-20 per cent higher cost of premium.
But the primary difference is in cash flow. In the case of death of the homeowner, a term insurance delivers the full sum assured to the nominee or family. This allows for the nominee to plan for loan repayment, full or partial, and still have funds in hand – depending on the sum assured and loan repaid to date.
In the more likely scenario of repaying the home loan, the term insurance can still be retained. The human life value (value of future earnings potential that is to be covered in term insurance) would have expanded significantly in the period the home loan was repaid and the term insurance originally intended for the home loan can continue to cover the increased human life value, but purchased earlier and so is cheaper.
The difference between the two is essentially a difference between insuring the liability or creating a cashflow based on adverse eventuality that can be used at discretion. The better option would be a term insurance which offers better control to the family.
Published on July 4, 2026
