Investing In Home Loan Insurance

Home loan is one of the biggest liabilities of an individual and in order to protect your financial dependents, you need to have a product that, in case of your demise, would pay off the outstanding loan to the mortgage company. Here is where home loan insurance steps in. However, the question is that if it is already taking care of one of your biggest liabilities, do you at all require a term plan? The article provides answers to such questions, right from what is home loan insurance to who should go with it 

The primary aim of insurance is risk management that helps you and your dependents financially for a minimal fee. Therefore, it is obvious enough that having insurance in place is a must, and specifically life and health insurance. However, before getting one, we first need to understand the adequate requirement of insurance. We cannot just go with what the insurance company tells through its promotion campaigns. And this is true of home loan insurance too.

Defining Home Loan Insurance

As we all know, taking a home loan is quite a long-term commitment. In fact, home loans can stretch up to almost 25-30 years or even more than that. Life is something that doesn’t come with any guarantee cards. So, what if under unforeseen circumstances the one who has the responsibility of paying the equated monthly instalments (EMIs) dies? The entire burden of paying the loan would then fall on the head of his or her financial dependents, and in most cases, they would be immediate family members such as spouse or children.

Therefore, if the loan is not repaid or the EMIs are not paid regularly, the house, which itself is collateral, might get seized. Hence, in such situations you need to be prepared well in advance and protect your family and loved ones financially. And this is possible by either having a term life plan or home loan insurance. Home loan insurance is nothing but a form of life insurance wherein if the insured passes away the home loan that he or she availed of can be cleared with the insurance claim amount.

Functional Aspects

Home loan insurance resembles term insurance. The insured is covered under this insurance plan till the home loan is completely paid. The insurance stands to expire once the outstanding loan amount has been paid off. However, if the insured person, who availed of the loan, dies within the loan term, then the nominee can claim home loan insurance in order to repay the outstanding home loan amount. Having home loan insurance ensures that the house or the other assets as collaterals are not seized by the bank.

Insurance Premiums

When it comes to payment of premium, most of the home loan insurance plans are single premium polices wherein you only have to pay single premium in lump sum while taking the policy. However, there are variants available for regular and limited premium payment terms. Under a regular premium plan, premium payment term is the same as policy term. Under a limited premium payment plan, the premium payment term is less than the policy term. That said, if you go with the single premium option, some banks allow you to combine the single premium with that of the loan amount. Say, for instance, if the single premium for a home loan ofRs30 lakhs works out to be Rs1 lakh then you can simply add this premium to your loan amount and pay EMI on Rs31 lakhs instead of Rs30 lakhs. We would, however, suggest you to avoid the same since you would unnecessarily pay interest on the premium amount as well.

The table above shows that the premium charged for home loan insurance is on the higher end when compared with pure term insurance. Pure term insurance is a more economical way to cover your liabilities as the premium is almost 20 per cent less than that of home loan insurance. The home loan insurance policy at any time does not acquire a surrender value or a paid-up value.Moreover, in case death of the insured is caused directly or indirectly by suicide within one year of the date of commencement or the date of issue of the policy, the insurance company would not accept the claim. While home loan insurance takes care of the home loan, what about other financial needs such as child’s education, child’s marriage and regular income? These cannot be taken care of with the help of home loan insurance as the purpose of the same is just to protect your financial dependents from the home loan burden in case of your unfortunate demise. In such a case, term insurance makes more sense.

Types of Home Loan Insurance Plans

There are basically three variants of home loan insurance plans as explained below:

1. Reducing cover option is the plan under which the life cover reduces similar to but may not be same as the loan repayment schedule. This means that the life cover diminishes just like your loan’s outstanding principal. At all times your life cover would be greater than your outstanding loan principal.

2. Level cover or fixed cover option, as it is popularly known, is the plan wherein the life cover remains constant for the term of the plan.

3. Hybrid of fixed cover and reducing cover option is the plan where there would be a fixed cover for a few years that will be followed by reducing cover for the remaining years.

Buyer Profile

The purpose of home loan insurance is to protect your financial dependents against any burden of home loan in your absence. It can be considered as term life insurance that covers the financial liability of your home loan. However, home loan insurance doesn’t cover anything apart from the home loan taken by you. Therefore, considering or buying only home loan insurance is suitable for those who have a good amount of assets or passive income sources that can take care of their family’s financial needs such as child’s education, marriage and also a regular income for your spouse until her life expectancy which is only applicable for those with non-working spouse. And for others, it is more sensible to opt for a pure term life insurance plan.

Conclusion

In this article, we have touched upon many points such as the working of home loan insurance, its types, premiums, etc. We even went on to discuss who should opt for this cover wherein we believe that those who have assets and regular passive income to take care of their financial dependents can opt for this cover. And for the rest, term insurance is a much wiser option that should also consider the burden of home loan while taking adequate cover. Moreover, in our opinion, even those who have access to assets and passive income should not opt for home loan insurance. This is simply because there is no valid reason to pay more when your purpose can be solved by pure term insuraance. Therefore, it is always better to go for pure term insurance.