Owning a home is a dream that most people wish to turn into reality. One may want a dream home to live in or want a home for investment purposes. Home loan acts as a helping hand in achieving this goal. Availing a home loan helps home buyers take a step closer to realizing their dream. The loan amount and the time period in a home loan are different from other loans such as car and personal loans. The amount is higher, and the time period is longer in a home loan. In case something happens to you in this time period of the loan, you need to make financial arrangements for your family regarding the loan.
This is exactly where adequate term insurance comes to the rescue. Besides choosing the right property, suitable lender, and accumulating down payment, availing adequate term insurance is an equally important step for home buyers.
For example, Mr. Kumar took a home loan 5 years ago, involving a loan amount of Rs 50 lakh, tenure of 20 years, and an interest rate of 10.5% p.a. With the time period of 15 years remaining, along with an outstanding amount of close to Rs 45 lakh, Mr. Kumar passed away due to a mishap. Now the burden of EMIs of close to Rs 49,919 for the outstanding home loan has fallen on his family. Had he availed term insurance that would have adequately covered the family’s expenses, liabilities, and investments, the home loan could have been repaid effortlessly.
Both the absence of term insurance and the presence of inadequate cover are equally harmful. In both cases, the family faces a financial burden regarding payment of the home loan EMIs along with other household expenses. In case the family is not able to make EMI payments, the lender has the right to recover outstanding dues by taking over the property. This would make matters worse for the family.
Thus, it is imperative for homebuyers to purchase adequate term insurance, including the home loan amount, to prevent their family from being financially burdened in case of their untimely demise.
Why Should One Cover Home Loans?
The long tenure of loans & high loan amounts are the twin primary factors that necessitate the need for homebuyers to cover their family from being burdened with home loan repayment in case of their untimely demise. Purchasing adequate term insurance forms a shield that protects your family by assisting them in repaying the outstanding home loan.
If we take up Mr. Kumar’s scenario above, the outstanding home loan amount involving EMI Rs 49,919 gets shifted to his family. If Mr. Kumar had purchased adequate term insurance, including the home loan amount, this would have saved his family from the financial burden with the huge repayment of the outstanding EMIs.
How Much Term plan Should You Take If You Have A home Loan?
The sum assured is calculated as the total of all expected recurring expenses and financial liabilities, such as housing loans. The amount of insurance taken should be adequate for repaying the liabilities along with maintaining a steady income for the family in case of your untimely demise.
For example, if your annual expenses are 6 lakh rupees and the outstanding home loan amount is Rs. 20 lakh, your ideal term plan assured amount should be at least [6 lakh x 20 = 1200 lakh + 20 lakh = 1 crore 40 lakh rupees]. This sum would ideally be adequate to cover the home loan repayment and your family’s living expenses for around 20 years.
Does Term Insurance Benefit Remain Intact If Home Loan Lender Changes?
When you avail of term insurance from a life insurance company, the benefits to be paid out remain intact irrespective of the home loan lender. Even if you decide to opt for a home loan balance transfer to another lender, your term insurance cover remains intact.
Home Loan Insurance vs. Term Insurance - Which One to Opt?
Term life insurance is a standard life insurance policy that pays benefits to the demise of the policyholder. Home loan Insurance is a specialized term insurance policy that repays the home loan in case of the policy holder’s demise.
Let's weigh these two to get a clear idea regarding which one to opt for:
A term plan requires regular payments of premiums. The premium of these policies is on the lower side. On the other hand, HLPP (home loan protection plan) usually requires a single lump-sum payment, making it a relatively costlier product vis-a-vis term plans. Moreover, being aimed specifically for home loans, it becomes an added cost to the home loan.
- Coverage of the Policy
A term plan provides assured cover upon the demise of the policyholder during the policy’s tenure. The death benefit amount acts as financial aid for the family. The amount of insurance can be put to multiple uses such as payment for household expenses, education, repayment of loans, etc. Some special term insurance plans even offer maturity benefits if the person outlives the tenure of the plan.
A home loan insurance policy is a specialized policy that covers the outstanding amount of a home loan in case of the demise of the policyholder during the tenure of the policy. This policy is issued on the basis of the tenure of the home loan. It does give any other benefit to the family.
- Special Riders
Term life insurance policy may give you options for add on riders to increase the amount of sum assured. Home loan insurance does not provide any such riders. There are no maturity benefits in a home loan insurance policy.
A term insurance plan seems to be more useful than home loan insurance, but home loan insurance can be used as additional insurance if your home loan amount is very high. In such a case, only term insurance may not be enough for your family as the sum assured would decline considerably after paying back the housing loan.
An adequate term insurance plan is an essential financial planning tool for everyone. It’s a must-have insurance policy to financially safeguard your family in case of your untimely demise. You must remember that absence or inadequacy of term insurance cover could gravely jeopardize your family’s financial future in case of your absence. Even if you already have term insurance when you decide to become a homebuyer, consider taking another term plan to adequately cover the home loan amount, thereby ensuring worry-free financial life for your nominees when you aren't around anymore. Alternatively, one can buy an add on home loan insurance policy for the same purpose.