Many people dream of living in a house of their own, and most of them take home loans to fund this dream. Usually, these loans have repayment plans that last up to several years. But, what if the person who has taken the passes away before the loan is paid off? Will the home be taken by the bank and the family left homeless? Will they be given a chance to repay the loan? What are some ways to safeguard the future of your home in the case of emergencies, particularly if you are taking a home loan?
While applying for a home loan, you might see that the lender or the bank persuading you to take up a home loan protection plan or term insurance. Although these home loan protection plans are not made, mandatory lenders would still urge you to take such home loan insurance or term insurance. This is done in order to attain protection against lending and credit risks.
These insurances usually help the lender and the borrower from risks and unforeseen emergencies. For instance, if the borrower passes away before clearing the entire home loan amount, the term or the home loan insurance would be used for the repayment of the loan amount if the borrower’s life insurance policy allows it.
Let’s take a closer look at home loan insurance and term insurance and understand which one you should pick when taking a home loan.
What is Home Loan Insurance?
Home loan insurance is generally taken when an individual opts for a home loan. This insurance acts as a cover for the lender as well as borrowers in case of unforeseen emergencies. Home loan insurance covers the outstanding loan amount which the borrower is liable to pay in case he/she passes away due to any reason. This eases the pressure of repaying the home loan amount on the dependants of the deceased and provides them with a sense of financial security.
The cover offered by home loan insurance plans decreases every passing year in proportion to the decrease in the loan amount to be repaid. In the event of the death of the individual who has borrowed the home loan, the home loan insurance company would settle the outstanding amount, which has to be repaid to the lender. This insurance automatically lapses if the loan gets repaid fully or if the borrower transfers the loan to a different bank.
Home Loan Insurance Vs. Term Plans
- Premium Amount of the Insurance Plan
The first deciding factor between home loan insurance and a term insurance plan is the money which gets invested in each of these plans.
In the case of term insurance plans, scheduled payments are required, which can be done over a period of time. However, in case of a home insurance plan, a one-time investment is needed. This is one of the main reasons why the premiums for home loan insurance plans are much higher, and this amount gets automatically added to the home loan amount. Also, the interest levied in such a case includes the premium which is paid against the home loan insurance. This makes home loan insurances costlier than term plans; just to give you an idea, as this example states, for a loan amount of one crore rupees, the term plan premium would be between Rs. 8, 000 to Rs. 15, 000 and for a home insurance plan would be nearly Rs. 50, 000.
- Life Cover Offered by the Plan
A specified life cover is offered by term insurance plans which can turn out to be beneficial for the dependants of the deceased borrower. The death benefit provided by the term insurance plan can act as a source of financial independence to the dependants, and it can also be used to repay any loan dues. Term insurance plans also offer maturity benefits if the individual outlives the term of the insurance plan.
On the other hand, home loan insurance plan only covers the home loan amount. This means that, as and when the home loan keeps getting repaid, the life cover of such an insurance plan keeps declining and ultimately comes to zero at the end of the loan period.
- Insurance Cover Modification
When you opt for a term insurance plan, you can modify the loan tenure based on your financial capabilities. However, in the case of home loan insurance, the money is invested completely in the beginning. This would mean that, even if you modify the home loan tenure, the period of a home loan insurance plan will remain the same. Thus, term plans offer much more flexibility as compared to home loan insurance.
- Add-ons Available With the Insurance
Home loan insurance plans come with an optional plan which includes cover against terminal illnesses, disabilities, and even joblessness. However, in recent years, term insurance plans have also started offering to add on plans at about INR 20-30 lakhs which provide cover against cardiac issues, cancer, disability, and similar medical conditions. The other advantage which home loan insurance plans have over the term insurance plans is that they cover nearly 3-6 months of EMIs, which needs to be paid against the home loan acquired by you. However, usually, this add-on comes at a hefty premium.
Is it Compulsory to Take Insurance With Home Loan?
Many home loan borrowers are under the impression that it is mandatory to take a home loan insurance plan or a term insurance plan while taking a home loan. However, while getting insurance along with the home loan can be pretty beneficial, it is not compulsory to do so. You are under no obligation to take an insurance plan from the lender’s bank or any other financial institutions. You are not required by law, or by any other financial authority, like IRDAI or RBI, to take insurance on your home loan. The decision of whether or not to purchase an insurance plan is solely with the borrower, and they cannot be forced into accepting it by the lender. You can even opt for an insurance policy which is not from the home loan lender.
What is the Benefit of Home Loan Insurance?
As discussed, taking home loan insurance is not mandatory, but this can be very beneficial for a borrower who has taken a home loan. Here are some of the benefits:
- In case the home loan borrower passes away unexpectedly, the home loan insurance can be used to settle the home loan amount, which is due to the lender.
- The dependants can use the excess amount of home loan insurance for fulfilling their financial requirements as well.
- The premium which is paid against these loans is eligible for tax deductions under section 80C of the Income Tax Act.
- You can opt for add-on benefits with home loan insurance, which can provide cover for disabilities, critical illnesses, and other health conditions.
How Does Mortgage Life Insurance Work?
Unlike the term insurance and home loan insurance, mortgage insurance is beneficial mostly for the lender. This insurance plan makes it possible for customers to qualify for a home loan on handing over a smaller down payment amount. While you bear the entire cost of the mortgage insurance, the protection is offered to the lender. Thus, in an event when the borrower dies, this insurance would pay off the balance amount of the mortgage. Here, if in case the borrower dies, the amount in this insurance would be paid to the mortgage lender and not to their dependents. The payout through this insurance policy matches the mortgage balance which you have. This way, the payout amount potentially decreases with time.
Buying a home is not an easy decision, particularly if a home loan is also involved in the equation. However, in addition to taking care of EMIs, you also need to consider insuring your home loan. Just like you wouldn’t buy the first house you see without considering the pros and cons, spend ample time comparing different home loans, insurances, and their benefits in order to take the most financially prudent decision.
Remember, you will be tied down with a home loan for a considerable amount of time, and it makes sense to get a safety net for your family. This safety net usually comes in the form of home insurance plan or a term insurance plan and offers the above-discussed advantages. These insurance plans offer protection to both the lender as well as the borrower in highly unlikely circumstances. Depending on your requirement and objective, choose the right insurance plan with the right set of add-on benefits. Make sure that you understand the terms and conditions of all different insurances and their eligibility conditions as well. If your budget allows, it is always advisable to avail insurance on your home loan to safeguard the interest of your family. Home loan insurance or term insurance, go for the one that you feel fits with your financial objectives and vision.
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