‘Lenders can’t force it’: What borrowers should know about bundled insurance with home loans

When you take a home loan, you may find your bank or housing finance company nudging—or even pressuring—you to buy insurance alongside it. This could be a life insurance policy or property insurance, and sometimes, the cost is bundled into your loan amount itself.

While buying insurance may sound like a wise precaution, the truth is that it’s not mandatory. Still, many borrowers either don’t know they can say no or fear that refusing might slow down their loan approval.

Insurance bundling

“Borrowers need to check whether a long-term policy is being pushed when they might be better off with annual renewable policies,” says R. Balasundaram, secretary general of the Insurance Brokers Association of India (IBAI).

He adds that the most commonly pushed insurance product during home loan disbursal is a home loan protection policy—a long-term life insurance plan for the borrower that matches the tenure of the loan. The idea is that if the borrower dies during the loan period, the insurer repays the outstanding loan amount, saving the family from financial stress.

But Balasundaram is clear: “This policy cannot be insisted upon by the lender, as the property is already mortgaged and the loan is secured. Borrowers should use their discretion—it cannot be forced.”

Property insurance: Useful, but know what you’re buying

Lenders are within their rights to ask for property insurance. After all, the property is the collateral backing the home loan.

“A basic fire and allied perils insurance policy costs around ₹2,000 annually for a ₹50 lakh property,” says Raj Khosla, founder and MD of MyMoneyMantra.com. “This typically covers the structure against fire, earthquakes, or floods. You can—and should—extend this cover to include the contents of your home. It’s a small price for safeguarding your biggest investment.”

But Khosla warns against bundled products that lenders often pitch: “These are usually single-premium policies included in your loan. While convenient, they’re not always the most cost-effective or flexible. Instead, borrowers should explore standalone options like term insurance or custom property insurance based on their financial situation.”

Balasundaram adds that long-term premiums can be expensive, especially when paid upfront. “Also, many borrowers prepay their loans. For example, a 15-year loan may be closed in five years, but the life policy bought for 15 years doesn’t refund the premium. That’s a waste. Don’t feel pressured—use your judgment. Even if you want insurance, there are smarter options.”

What should borrowers do?

There’s no denying the importance of life insurance when you’re taking on a long-term liability like a home loan. If the borrower passes away, the debt doesn’t disappear—it falls on the family. So yes, life insurance is crucial. But you do have choices.

“You can either buy a pure term insurance plan or opt for a loan protection policy,” explains Adhil Shetty, CEO of BankBazaar.com. “A term plan is cheaper and more flexible. It continues even if you refinance or prepay your loan, and your family gets a lump sum payout they can use however they wish.”

On the other hand, a loan protection policy is usually bundled with your loan, paid upfront, and the coverage amount drops as your loan balance falls.

“It’s important to understand that buying this insurance is not compulsory. Regulators don’t require it, and lenders can’t force it,” Shetty stresses. “You’re free to choose your insurance—or none at all. If you do want it, compare the lender’s policy with other options in the market. Focus on value, not just convenience.”