Home Loan Insurance Gaps: Why Borrowers Face Hidden Risks

Many home buyers think their loan insurance will clear the full debt if something goes wrong. The truth turns out differently when claims come up.

It happens quietly. Borrowers trust banks and sign whatever is offered with the home loan. Later, they discover the insurance didn’t match what they believed it covered.

In September 2025, property registrations in Mumbai jumped by 32 percent, as per Maharashtra’s revenue department. Nearly 80 percent of these were backed by home loans. But very few checked what their insurance would really pay.

Banks often say it’s a safety cover. But no one explains how reducing-sum plans work.

Why Home Loan Insurance Promises Don’t Match Reality?

A home loan insurance policy is meant to protect borrowers or their families if the borrower dies or becomes disabled. Sounds fair. But real cases show gaps.

Banks usually sell reducing cover plans. The insured amount shrinks each year, but the loan doesn’t always reduce the same way. Some borrowers take top‑ups or extend tenure. The insurance doesn’t stretch to fit that.

Read More – How to Save Tax on Your Home Loan Before the Filing Season Starts

In 2023, a case listed on Indian Kanoon showed how a bank deducted the premium but never issued policy papers. When the borrower died, his family couldn’t prove the cover existed. The court said insurance was optional. Still, no payout came. That’s how things slip through.
 

The gap looks small on paper but hurts most when a claim comes.

What Do Reports Say About Home Loan Insurance Coverage?

The IRDAI product structure (UIN: UNIHLIP22139V032122, 2022) states that insurance covers only the principal outstanding at the time of death. Missed EMIs are excluded.

That one clause has trapped many families.

The NHB’s 2019 study found that low‑income borrowers either skip insurance or buy one that doesn’t match the loan size. The RBI 2023 advisory reminded banks to disclose full terms but didn’t change much on ground.
 

Even with these reports out, things haven’t changed much.

Were Such Problems Seen Earlier? Learn from Missed Cases

In October 2025, Livemint published real stories of borrowers misled by home loan covers. One man with an ₹85 lakh loan got a health policy instead of loan insurance. Another had fire cover for ₹9 lakh on a property worth ten times more.

These were not one‑off errors. They were patterns repeated across lenders.

How Have Banks and Government Reacted Over Time?

The RBI 2023 directive asked banks to take clear borrower consent before selling insurance. In practice, loan staff still bundle it with paperwork. The IRDAI keeps saying it’s optional, but customers rarely hear that clearly.

Also Read – Which Home Loan Tenure Works Best in India? A 10-20-30 Year Breakdown

Government housing schemes like PMAY do not include insurance by default. Borrowers have to buy separately. Once you refinance or switch banks, the policy ends, and you must start again.

Conclusion 

Loan insurance not matching the actual home loan amount is now common. Borrowers usually realise it during claims, when it’s too late.

Asking a few questions early can prevent this. How long is the cover valid? What happens if the loan is transferred? Does the insurance include missed EMIs?

Protection should mean full protection, not partial comfort. Better to check now than argue later.