Property registrations have jumped 32% from a year earlier in September, with Mumbai alone accounting for 12,000 home sales.
Roughly 80% of these homes are financed through loans, according to Knight Frank. And that’s when many borrowers find themselves saddled with an insurance policy hard-sold by their lender—one that doesn’t always suit their needs or even protect them adequately.
While insuring a borrower’s life or property can be good practice, lenders frequently mis-sell or bundle policies that are irrelevant, inadequate, or poorly aligned with the borrower’s liability. Regulators don’t mandate such covers, yet the practice persists, leaving many homeowners financially exposed.
National Housing Bank’s best practices circular makes it clear: “Companies should not …force a customer to either opt for products of insurance company or link sale of such products to banking product…purchase of insurance is purely voluntary and not linked to availment of any other facility from the housing finance company.”
Why insure anyway?
Even though it’s voluntary, experts say insuring a home loan is sensible.
“It is essential to secure your loan because due to loss of life or disability, the earning member may be unable to repay the loan,” says Naval Goel, founder and chief executive officer (CEO) of PolicyX. “The financial burden could force banks to sell the house.”
Borrowers typically choose between three products—a term life plan (covers borrower’s life), home insurance (covers property damage), or home loan insurance (covers EMIs in case of death or disability).
Inadequate covers
Often, the insurance bundled with a loan is inadequate or misplaced—covering less than the loan amount, or insuring the wrong person for higher commissions.
Take the case of mutual fund distributor Vivek Damani, who discovered his home loan insurance covered just one-tenth of his total loan. Home loan insurance works like a decreasing term life policy, protecting against events such as death, disability, or job loss.
“Under home loan insurance, total coverage reduces as the loan is paid back. You can get a premium refund if you foreclose the loan,” explains Ajay Sehgal, director, Allegiance Financial.
“Loan sanction letter only states the premium paid,” says Damani, who was insured for only ₹26 lakh despite a much higher loan value.
“While I knew that the total loan outstanding needs to be covered, people who aren’t aware will store the documents and not realize the inadequate cover until the need arises—usually during the death of the borrower,” adds Damani, who received the sanction letter a week before the insurance policy document.
Home loan insurance is sold only through banks, where EMIs are paid from the insurance fund in case the borrower dies, loses their job, or becomes disabled. Yet, while lenders hard-sell such products, need analysis and coverage adequacy often fall short.
“Mismatch causes financial exposure to the family. Keep the cover aligned with liability. Read the policy document and cross-check the amount of cover before signing,” cautions Pramod Kathuria, founder and CEO, Easiloan.
Irrelevant covers, wrong policies
Banks prefer that loans are insured to avoid unsecured liabilities. “The liability of covering the debt rests with the borrower,” says Ajay Sehgal, director, Allegiance Financial.
But if risk protection is the aim, why are irrelevant covers being sold?
Take the case of a 46-year-old Diva resident who was sold a critical illness policy along with his ₹85 lakh home loan in 2019. After his death, his widow has been fighting with the bank and the insurer for six years—a term plan could have protected the family, unlike a critical illness cover that didn’t trigger repayment.
Similarly, a Palava resident in Mumbai was sold a fire insurance policy worth only 10% of his property’s value—grossly underinsured. “Such a cover wouldn’t adequately protect the property, and insurers would further reduce the payout because of underinsurance,” explained Sehgal.
“The best choice is to opt for a term insurance product aligned with the liability, not a critical illness or endowment policy,” said Kathuria.
Auto debited later
Banks also seek declarations when borrowers decline insurance at loan disbursal. But these can hide clauses allowing auto-debit mandates for future policies.
Take spice merchant Nimit Vora, 41, who bought a house in Thane in 2023. After declining an insurance policy, the bank withheld his loan papers until he signed a declaration to “buy insurance later.” Six months on, ₹7,500 was auto-debited from his account.
“When I declined insurance, the private bank took away my loan papers. They sanctioned the loan only after I gave a declaration to buy insurance later. After six months, I saw an auto debit from my bank account,” says Vora, who unknowingly permitted it.
Too exhausted to pursue the complaint, Vora says, never sign documents blindly.
Cover in the wrong name?
A Bengaluru couple took a joint home loan where the wife earned three times the husband. When she passed away three years later, the family discovered the bank had insured the husband—the lower earner—for a higher premium, purely for higher commission.
“Liquidity is affected due to such instances and hence a home loan should always be adequately insured,” said Sehgal. “Insuring a non-earning member defeats the whole purpose of insurance.”
Banks often ask borrowers to assign existing insurance policies to them. This can backfire once the loan is repaid, as the life cover may continue beyond the loan term.
If the policy is assigned, remember to remove the bank’s endorsement after repayment using the final loan closure letter.
Interest payment on premium
Avoid adding the insurance premium to your loan amount—you’ll end up paying interest on the insurance.
A ₹6 lakh single premium added to a ₹2 crore loan can inflate EMIs by ₹5,000 a month ( ₹1.71 lakh vs ₹1.66 lakh).
What to do?
Insurance isn’t mandatory with a home loan, but it’s wise to have adequate coverage. If you already have a policy protecting your liability, show it to the bank and avoid signing new commitments.
If mis-sold, you can cancel the policy within the 30-day free-look period.
Vivek Damani did just that—he returned the inadequate cover sold by his bank and purchased a reducing term life policy instead.
“Assess the policy documents after receiving them and use the free-look period to cancel inadequate covers. You can also approach the banking ombudsman, though the process is time-consuming,” says Sehgal.
Grievance redressal
Insurance regulator Irdai has repeatedly warned banks and NBFCs against forced or wrong selling.
Under Regulation 21(2) of the IRDAI (Registration of Corporate Agents) Regulations, 2015, lenders are expressly forbidden from compelling customers to buy insurance.
Complaints can be filed via policyholder.gov.in or bimabharosa.irdai.gov.in.
For housing finance companies, grievances can also be sent to the Department of Regulation and Supervision at the National Housing Bank (cr****@*****rg.in)—after writing to the bank first and waiting the 30-day response period.
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