The Buyt Desk
Owning a house is an aspiration for many. It’s a big dram with a big budget. You need a huge amount to purchase a house and thus home loans make this dream achievable. People take a home loan for a tenure of 15-20 years and repay back the loans through equated monthly instalments (EMI). But what if the loan borrower is not able to repay the loan or meets with an unfortunate incident of death or accident? It can cause severe financial stress to the family. That’s why it is important to have a protection plan for your loan. You could either buy a separate home loan insurance or have a large enough life insurance cover that could serve as a risk cover for your loan.
What are Home Loan Insurance and its benefits?
A home loan insurance plan provides the borrower coverage for the risk of loan repayment during the tenure of the loan. In case the borrower (insured) loses his /her job or becomes disabled due to an accident or sudden death, the home loan is repaid by the insurer. This act will help both the lender and borrower along with the dependents of the borrower. When the lender offers the home loan insurance, it will be a single premium plan and it will be added to the home loan and hence the EMI increases. Sometimes you may even have to pay a separate premium during the loan approval process.
By buying an insurance plan, the house owner will save the surviving family members from the responsibility of repaying the loans if the borrower dies during the loan tenure. Also, the lender will be saved from bad debts as the insurance company will pay off the loan for the borrower. Opting for a mortgage loan works in favour of the borrower as the lender feels safe to approve the loan as the chances of loan default are zero.
Home loan insurance vs. Term insurance
Cost/Premium
The premiums of home loan insurance plans are considerably higher compared to term insurance. The home loan protection plan requires fees to be paid upfront while it is distributed over the tenure in term insurance. Usually, the home loan protection plan premium is part of home loan EMI if you buy it with a lender.
Tax Benefits
Whether it is the premium of a term insurance plan or a home protection plan both can give a tax deduction under section 80C of the Income Tax Act 1961.
Cover
Home loan insurance only covers outstanding loan amount unlike term insurance which covers all liabilities of the insured including dependents and home loans.
Coverage period
The house loan protection plan covers the insured only till the home loan is completely repaid and also the coverage keeps on decreasing as and when repayment is done. While the term insurance provides coverage till the insurance term ends irrespective of the home loan and the coverage remains the same till the end.
Flexibility
When you refinance or alter the term of the home loan, the home loan insurance’s tenure cannot be changed. Also, it cannot be transferred when you change lenders. It is fixed insurance which cannot be changed as per needs and covers only home loans to be repaid. But the term insurance plans are flexible, you can anytime extend the sum assured to cover your extended home loan and covers all insured’s liabilities and debts including the home loan.
Rider Plans
Term insurance can be enhanced with add-ons for more coverage. There are rider plans to cover critical illness, accidental deaths, disabilities, unemployment and many more. Home loan insurance also has a few riders which cover terminal illness, accidental death, EMI waiver in case of job loss of up to three to six months and disability. But the cost of rider plans in home loan insurance plans is very high compared to the same in term insurance.
Summing up
The sum assured remains constant for a term life insurance and the same is paid to the nominee in case of death of the insured. In the home loan protection plan, the sum assured keeps decreasing and is equivalent to the outstanding loan. If buying insurance exclusively for a home loan then a home loan protection plan is more affordable because of decreasing sum assured. But if you already have sufficient term insurance coverage that is enough to cover your home loan too, you need not buy another insurance to cover your home loan. Always remember that your term insurance plans’ assured amount should be at least 10 times your current annual income.
When your term insurance is enough to cover only your current liabilities and debts, you will need new home loan insurance. As the insurance has tax benefits, it is safer to buy new insurance to safeguard your dependents against a major financial liability. Consider all the above points and make a wise decision about buying new insurance as per your financial conditions and requirements. Don’t buy a plan just because your lender asked you to when you have adequate term insurance coverage.
