Answer Book question
The bank may require that the house or the machine is insured. It cannot require that you buy the policy from its partner insurer, and it cannot make a personal life-insurance policy a condition of sanction. 'Bundled' insurance sold as compulsory is mis-selling, and RBI and IRDAI have both said so. You are entitled to produce your own policy from any insurer, and to refuse the add-on policy without the loan being affected.
The bank may require that the house or the machine is insured. It cannot require that you buy the policy from its partner insurer, and it cannot make a personal life-insurance policy a condition of sanction. 'Bundled' insurance sold as compulsory is mis-selling, and RBI and IRDAI have both said so. You are entitled to produce your own policy from any insurer, and to refuse the add-on policy without the loan being affected.
A poultry farmer in Konni is told his ₹12 lakh term loan will be 'processed faster' if he takes a ₹38,000 single-premium life policy from the bank's insurance partner, financed into the loan. He agrees because he needs the money. That premium is now part of his principal, earning the bank interest for seven years. Nothing in the sanction required it.
Property and asset insurance to cover the bank's security is a legitimate condition: the bank wants the collateral protected. RBI's fair practices code and its directions on bank conduct require that any such insurance be offered with a clear choice of insurer, that the customer not be forced to buy from the bank's corporate-agency partner, and that the cost and optional nature of any add-on product be disclosed.
IRDAI's rules on corporate agents and on protection of policyholders likewise bar tying insurance to a loan. Life insurance on the borrower is an add-on, and it is optional. If you want it, term cover bought separately is usually cheaper than a bank-sold single-premium plan.
The sanction letter: does it list insurance as a condition, and does it name an insurer? Naming an insurer is the red flag Whether the premium was financed into the loan amount (you are paying interest on it) The policy itself: is it pure term cover, or a savings plan with low cover and a surrender penalty? The free-look period: most life and health policies can be cancelled for a refund within 30 days of receiving the document Whether the charge appears in the Key Fact Statement as optional
Signing because the loan 'will not go through otherwise'. If the loan was sanctioned, the insurance was not the reason. Also: the free-look window. Most bank-sold policies can be returned in the first month for a near-full refund.
Bank-sold 'loan protection' policies are particularly common on gold loans and small business loans in Kerala, and on NRI home loans where the borrower signs remotely and does not read the rider. For a home loan, a plain term policy equal to the loan balance, bought directly, typically costs a fraction of the bank's bundled product.
₹38,000 premium financed into a ₹12 lakh loan at 11% over 7 years adds roughly ₹17,000 in interest. A separate ₹15 lakh term policy for a healthy 35-year-old costs in the region of ₹6,000 to ₹8,000 a year and is cancellable any time.
If you want the loan covered on your death so your family is not pursued, some insurance is sensible. The point is choice, not refusal. And property insurance on a mortgaged house is a legitimate requirement; just buy it where you like.
Ask for the sanction conditions in writing before you sign any policy form If a policy was pushed, use the free-look period and write to the insurer to cancel Complain to the bank's nodal officer; escalate to RBI Ombudsman (bank conduct) or IRDAI's Bima Bharosa (insurer conduct)
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Loans & bank disputes · Insurance review
RBI Master Direction on fair practices and customer protection for loans · IRDAI (Protection of Policyholders' Interests) Regulations, 2024 and corporate-agent rules · Your sanction letter and the policy document's free-look clause Last checked: 22 August 2026. Rates, limits and whether you may qualify change. Confirm with the official source before you act. Ask Kerala Rising: Use only general, non-identifying facts.
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