While taking a loan, banks and non-banking financial firms generally insist on certain insurances. This works as a risk hedging instrument for the lender. These insurances are loosely referred to as loan insurance. More specifically, there are two different types of insurance cover. The first is a life insurance. The life insurance policy would trigger on the death of the loan applicant. The loan amount is generally considered as the sum assured. The policy is usually assigned to the lender. So, the insurer would pay the sum assured to the lender. This insurance amount would be used to settle your outstanding dues
The second insurance is to cover physical damage to the house. In case of any fire, earthquake, flood, etc., the insurance would pay the repair cost. The insurance is taken only on the value of reconstructing the house and not on the loan amount. Here again, under a bank clause, the name of the lender is endorsed. In case of a claim, the insurer would take a no-objection certificate from the lender before paying you the claim amount.
Since you are taking a loan to purchase this asset, both insurances are highly recommended. In the absence of these insurances, your family or you would end up with the loan outstanding in one case with a reduced capacity to pay the loan and in another a depleted asset.
While it is recommended to buy these insurances, you need not buy this from the lender. Most lenders also have a tie-up with a few insurers and work as their agents.
Often, lenders bundle the premium in the principal loan amount and allow you to repay this in monthly premium. This has three key disadvantages. First, the lender usually pushes for single premium plans that cover the duration of the loan or the maximum period allowed by the insurer. It makes more sense to pay these premiums annually. You may also easily choose to discontinue the policy at some point in case of an annual policy. The second disadvantage is that you could get cheaper premium when you buy from other insurers. Third disadvantage is that you would have to pay interest on the insurance premium amount as well, if it gets added to your loan amount.