Is Insurance Mandatory for a Loan Against Property? 

Is Insurance Mandatory for a Loan Against Property? 

Many people dream of owning a property. With that, people also explore ways to leverage their properties for financial backing. This leads to a common query: Is insurance obligatory when securing a loan against property (LAP)? To individuals using their real estate assets to secure financial support, the necessity of insurance in LAP transactions becomes an important question. Let’s explore this query to clarify the role of insurance in loans against property. 

Is Insurance Compulsory for Loan Against Property? 

A loan against property is a valuable financing tool, allowing property owners to access funds against their real estate assets. The flexibility of LAPs enables borrowers to harness equity in their properties for various financial needs, making it a valuable option. Financial institutions that offer LAPs often strongly recommend insurance coverage as part of their lending terms. 

Contrary to popular belief, the law does not mandate property insurance for home loans or for loans against property in India. 

Reasons Behind Insisting on Loan Against Property Insurance 

Lenders recommend LAP insurance as a proactive measure to address potential risks that could hinder a borrower’s ability to repay the loan. These risks include a spectrum of unforeseen events that might disrupt a borrower’s financial stability. Anything from unexpected disabilities and critical illnesses to loss of income greatly impacts the borrower’s capacity to meet loan obligations. 

Furthermore, in the unfortunate event of the borrower’s passing, LAP insurance stands as a protective shield, ensuring that the outstanding loan amount is covered, thereby alleviating the financial burdens of the borrower’s family or estate. 

Benefits of Loan Against Property Insurance 

LAP insurance offers a safety net by ensuring the outstanding loan amount is recovered in case of unforeseen adversities. This protection safeguards the borrower’s property assets and provides financial stability during challenging times. These are the types of LAP insurance that could prove beneficial to the borrower: 

  1. Property Insurance: The mortgaged property is insured. This insurance ensures that the property maintains its value and continues to provide security for the loan in the face of potential damage or destruction. Common risks that buildings might face, like fire, water damage, etc., are covered with this insurance. Entities that can be insured under this policy are: 
  • Residential property 
  • Commercial property 
  • Industrial property 
  1. Credit Life Insurance: This form of insurance policy financially protects the borrower. The amount of the insurance is matched with the loan amount. In the event of the borrower’s passing, credit life insurance would ensure that the loan does not become a financial liability to the borrower’s family.  

Considerations When a Lender Insists on LAP Insurance 

According to the Insurance Regulatory and Development Authority of India (IRDAI), there has been a surge in the variety of insurance products tied to loans, indicating a broader spectrum of coverage options. Understanding the coverage details is crucial to ensure it aligns with the borrower’s needs and offers comprehensive protection. 

  • Insurance premiums can significantly increase borrowing costs, potentially affecting the loan’s effective interest rate by up to 2%. Additionally, the insurance premium can extend its tenure or increase EMIs, impacting overall financial liability. 
  • Premiums paid for LAP insurance may offer tax benefits under Section 37(1) of the Income Tax Act, considering them as a business expense. Consider the benefits and weigh them against the increase in the borrowed amount. 
  • Insurance coverage varies; some policies are comprehensive, while others may only cover outstanding loans upon the borrower’s demise. Choosing a policy that suits your financial goals and situation could be a great help. 


While the law doesn’t enforce insurance for a loan against property, comprehending the advantages and potential risks linked with LAP insurance equips borrowers to make well-informed decisions. 

Assessing one’s risk appetite and financial stability is imperative when considering LAP insurance. While it’s not mandated by the law, evaluating personal circumstances and available insurance options helps one make an informed decision aligned with individual requirements and safeguard their property assets amidst unforeseen circumstances.  

Explore all the details of loans against property and insurance coverage thoroughly to ensure financial preparedness and security against unexpected challenges. 


Do RBI guidelines for home loans mandate property insurance? 
According to RBI guidelines, property insurance is not compulsory for home loans. While financial institutions may recommend or offer insurance coverage as part of their lending terms, RBI regulations do not explicitly make property insurance mandatory for individuals availing home loans. 

Is insurance mandatory for unsecured loans? 
For most unsecured loans, insurance isn’t mandatory. Unsecured loans, by nature, don’t require collateral, so lenders generally don’t mandate insurance coverage as a condition for obtaining such loans. However, it’s essential to note that specific lenders might offer optional insurance coverage for unsecured loans, but it’s not a regulatory or industry-wide requirement for borrowers seeking unsecured financing. 

Which type of insurance is mandatory? 
No single type of insurance is universally mandatory. The necessity for insurance largely depends on various factors like the type of loan, lender’s requirements, and borrower’s circumstances. While some loans may require certain types of insurance, such as property insurance for mortgages, it varies case by case and is not universally applicable across all loan types. 

What is the significance of a good insurance policy in the loan repayment procedure? 
A good insurance policy serves as a protective shield, ensuring financial security in unexpected situations. Insurance provides coverage for unforeseen events, safeguarding borrowers against financial strain that might affect their ability to repay loans. For instance, a comprehensive insurance policy can offer coverage for loan repayments in case of unexpected setbacks like job loss, disability, or critical illness, mitigating the risk of defaulting on loan payments. This level of security enhances borrowers’ confidence and ensures a smoother loan repayment process. 

Ashutosh P
Ashutosh P

Ashutosh has more than 18 years of experience in commercial banking and SME finance. He heads the branding and marketing for the company and is also the product head for the secured business finance and rooftop solar finance business. Ashutosh boasts over 20 years of extensive experience in the fields of commercial banking and SME finance. Currently, he holds multiple key roles within the organization, including heading the MD's office, overseeing Strategy and Marketing, and serving as the Product Head for the rooftop solar finance division. Additionally, he spearheads various initiatives that have been instrumental in driving the company towards achieving significant impacts in environmental sustainability and financial inclusion.

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