Importance of Life Insurace For People with Home Loans

For many of us, owning a home of our own is a key financial milestone that requires years of disciplined savings and meticulous planning. To accomplish this dream sooner, many individuals resort to taking home loans. Increasing competition among lending institutions has resulted in competitive rates being offered on such loans. This has made it possible for even those who’ve just started out in their careers to buy a home.

Although home loans can be easily availed, many are still skeptical to get one, considering the biggest risk it poses - in case of non-repayment, the lender will seize the property. Picture this - Mr. X is the sole breadwinner in his family. He has taken a home loan of Rs. 60-lakh to buy his dream house. One day, while going to work, he meets with an accident and passes away on the spot. He is survived by his spouse, who is a homemaker, and two children. Now that there is no inflow of money, how will his family members manage to pay off the loan? If they don’t find a means to honour the remaining EMIs, the bank has the rights to seize their home.

To keep such an instance from arising, financial experts generally advise individuals seeking a home loan to first have a term insurance cover in place. Term insurance is a life insurance product that provides coverage for a specified period of time. If the life assured passes away during the policy period, the insurance company will pay out the sum assured to the beneficiary. This amount can be put to use in any manner the beneficiary likes. In the above scenario, Mr. X’s spouse can use it to pay off the remaining loan amount.

Life Insurance to Protect Against Home Loan Liabilities

Those who wish to go ahead for a home loan are generally advised to opt for a term plan whose sum assured is equal to ten to twenty times the annual income plus the loan amount to be paid. This way, if anything happens to you - the borrower - your family will have sufficient funds in place, not only to repay the loan amount, but also to cover their everyday expenses. Term insurance is therefore a must-have insurance product for anyone planning to borrow money from the bank.

Often times, people are confused between availing life insurance to protect against home loan liabilities and specially designed Home Loan Protection Plan (HLPP). On comparing the rates, you will find that the premium for a HLPP is higher than that of a term insurance plan. This is mainly on account of the fact that HLPP is a single-premium policy. The annual premium for a term policy with a sum assured of Rs.1 crore would be approximately around Rs.8,000-15,000. The same cover can cost an average of Rs 50,000 in a home loan insurance plan. Thus, it can be concluded that individual term insurance is more affordable as compared to a HLPP.

Another point of difference between the two is the pay-out offered by them. Term plans offer a specified protection cover, which becomes payable if the life assured dies. The death benefit can be used to repay the loan amount that is still due or simply act as a financial aid for the family. If you opt for a term plan with return of premium option, you will be eligible to get the premiums back on surviving the policy term. The functioning of a HLPP, however, is more complex. The policy is designed to cover the loan amount that has been sanctioned. Therefore, the policy’s cover will keep declining as you repay the loan. It will amount to zero by the end of the term.

Why Take Life Insurance to Protect Against Home Loan Liabilities

Home loans are long-term contracts - they are usually taken for 25 years or so. The lending institution grants the amount on the fundamental assumption that you’ll be working for the entire loan repayment period and earning a regular income. However, life is uncertain. In the event something untoward happens to you (resulting in the regular income getting cut off), your family will have to shoulder the burden of the EMIs.

To prevent such an instance from arising, it is highly recommended to have life insurance to protect against home loan liabilities. This way, in case of the early demise of the borrower, the pay-out from the policy will act as a shield, protecting the loved ones by helping them pay-off the outstanding home loan.

Reasons to Avoid Mortgage Life Insurance

Mortgage life insurance is a kind of policy that is specifically designed to protect a repayment mortgage. In case the policyholder were to pass away while the policy was in force, the insurance company would pay out an amount that is just enough to cover the pending mortgage. Additionally, the benefit value of the policy shall decline as one repays the mortgage. Thus, the policy’s sum assured would equal to the outstanding mortgage/loan amount.

When these factors are taken into consideration, it can be concluded that a regular term insurance policy is a better choice. The sum assured, fixed at the time when the policy was taken, will remain the same for the entire policy term. Additionally, the proceeds from the term cover will be given to the beneficiary, who can use it as per his or her discretion. The pay-out from the mortgage protection life insurance can only be utilized to pay off the remaining loan amount, whereas the sum assured of a term plan can be used by the beneficiary to cover the outstanding loan payments as well as other expenses.

What You Must Know

An important point you need to note is that availing an insurance cover is not mandatory by law. Although experts will advise you to buy insurance while taking a housing loan, you are not under any obligation to do so. There are no such laws in place that mandate borrowers to avail an insurance cover while taking a home loan. It is at the sole discretion of the buyer - financial institutions cannot force borrowers to purchase any insurance plans.

Conclusion

The market is flooded with a plethora of life insurance products. Prior to borrowing, make sure to compare the different life insurance policies that will protect against home loan liabilities. Accordingly, proceed to avail a cover. Make sure the policy that you select covers all your pending debts. This way nothing will hinder the financial well-being of your loved ones in the event you’re no more.