Promised Security, Delivered Stress: The Home Loan Insurance Crisis No One Talks About

In early 2024, Anjali Mehra’s world was turned upside down when her husband Rajeev passed away unexpectedly. Amid the emotional devastation, she believed at least one thing would ease the financial blow—a life insurance policy tied to their top-up home loan. But instead of support, she was met with rejection, red tape, and relentless reminders to repay the remaining Rs 28 lakh loan.

What was marketed as a safety net became a new source of trauma.

The Fine Print Few Understand

Rajeev Mehra had taken a top-up home loan from a leading bank (referred to here as “Stellar Finance”) bundled with a group life insurance policy offered by its partner, Stellar Life Insurance. The policy was supposed to cover the outstanding loan in the event of his death.

However, after Rajeev died from multi-organ failure caused by dehydration and infection, the insurer denied the claim. The reason? Alleged non-disclosure of pre-existing conditions—type 2 diabetes and fatty liver—even though there was no evidence these conditions contributed to his death. Hospital records didn’t mention them, and the policy application required only basic yes/no answers, with no medical exam.

A System that Fails the Bereaved

For grieving families like Anjali’s, the emotional loss is often followed by a financial nightmare. The same bank staff who had once strongly recommended the insurance quickly shifted focus to loan recovery, citing technicalities and fine print.

“I thought we were securing our future,” said Anjali. “No one warned us that the insurance could be denied so easily.”

Legal Experts Weigh In

Legal experts argue that such rejections are often weak under judicial scrutiny. In cases like Satwant Kaur Sandhu vs. New India Assurance Co. Ltd. (2009), courts have ruled that insurers are presumed to accept the declared risk if no medical exam is required.

“Insurers can’t escape liability by pointing to a yes/no checkbox after issuing a policy,” says Avani Joshi, senior partner at Joshi Legal Associates. “They must verify health details upfront if it truly matters.”

Common Diseases, Convenient Denials

There’s a growing concern about insurers using common lifestyle conditions—like diabetes—as catch-all excuses to reject claims, even when those conditions had no role in the death.

Courts including the Delhi State Commission and NCDRC have stated that unless the illness directly contributes to the death, citing it as a basis for rejection is both legally weak and ethically questionable.

The Bigger Problem: Forced Insurance

Anjali revealed another disturbing practice—being told that the loan would only be approved if they bought insurance from the bank’s partner company. This violates IRDAI regulations, which clearly state that borrowers must be free to choose any insurer.

Despite regulatory warnings, financial experts say forced insurance bundling is still common, turning consumer protection into a profit tool for lenders.

Time for Change

Anjali’s ordeal highlights a deeply flawed system that fails families in crisis. While some do get relief after long legal battles, most lack the resources, energy, or support to fight.

Borrowers must remain vigilant:

• Always demand clarity on insurance terms.
• Review exclusion clauses carefully.
• Know your right to select your insurer.

And for regulators like IRDAI and RBI, this is a wake-up call. Stronger oversight, stricter penalties for mis-selling, and better grievance redressal mechanisms are urgently needed.

Until then, home loan insurance may offer little more than hollow reassurance at a time families need genuine help.

(Based on reports from ET Wealth and legal case analysis. Names and institutions changed for privacy.)