What is home loan insurance and is it necessary to buy one?

livemint.com:

I am in the process of buying a home. My real estate agent is getting all the paperwork done along with the home loan application. The agent told me that I would also have to buy home loan insurance. I am sceptical about this. Is it necessary to buy home loan insurance? —Name withheld on request While taking a loan, banks and non-banking financial firms generally insist on certain insurances.

This works as a risk hedging instrument for the lender. These insurances are loosely referred to as loan insurance. More specifically, there are two different types of insurance cover.

The first is a life insurance. The life insurance policy would trigger on the death of the loan applicant. The loan amount is generally considered as the sum assured.

The policy is usually assigned to the lender. So, the insurer would pay the sum assured to the lender. This insurance amount would be used to settle your outstanding dues.

The second insurance is to cover physical damage to the house. In case of any fire, earthquake, flood, etc., the insurance would pay the repair cost. The insurance is taken only on the value of reconstructing the house and not on the loan amount.

Here again, under a bank clause, the name of the lender is endorsed. In case of a claim, the insurer would take a no-objection certificate from the lender before paying you the claim amount. Since you are taking a loan to purchase this asset, both insurances are highly recommended.

In the absence of these insurances, your family or you would end up with the loan outstanding in one case with a reduced capacity to pay the loan and in another a depleted asset. While it is recommended to buy these insurances, you need not buy this from the lender. Most lenders also have a tie-up