Owning a house is one of the goals that everyone set for themselves. Most of us take loans and often use our life’s savings and even future incomes to reach this milestone of life. However, this goal can crash down if you are not able to repay the home loans. The risk of non-payment of home loans mainly occurs because of two reasons: The demise of the borrower, and the loss in earning capacity of the borrower due to a disability or critical illness. In case of non-payment of loans, one may have to leave their asset or property as a mortgage to the lender.Read more
In this article, we are going to discuss how term insurance plans cover home loan risks:
A term insurance plan helps in solving all the above-mentioned unforeseen uncertainties. It is one of the cost-effective options that provide a large life cover at relatively low premium rates. In case of the borrower’s death, the dependents or family members are secured with term plan coverage which they can further use to repay the home loan.
Make sure that the policy term is greater than or at least equivalent to the loan term. The best term plan is a combination of base life cover and additional benefits through riders available on additional premium payments. Suffering from life-threatening diseases like cancer, organ failure, stroke, or accidental dismemberment can result in a loss of the borrower’s earning capacity. In such cases, add-ons such as accidental benefits or critical illness riders protect you by providing lump sum and unique benefits that help in repaying a loan.
The homeowner's responsibility does not end with buying a house. In fact, it starts from purchasing and ends only after the total home loan is paid. For example: If you buy a house for Rs. 40 Lakhs with a 20 years’ term at a 9% rate of interest, you will have to pay a monthly EMI of Rs. 36,000. You have the option to increase the term to up to 30 years to decrease the monthly EMI but then the loan will become costlier. This means you will have to pay more than what you availed from the bank.
Home loans have a high risk of default mainly because of the following reasons:
Permanent Disability or death of the borrower
Loss of job
In such cases, a home loan-linked term insurance plan secures the surviving family members from the debts of heavy home loans. A term insurance plan may not provide you protection in case of a normal loss of a job, but it can surely help you in case you lose your job because of any major accident or critical illness. However, you will be required to purchase riders to protect yourself from such uncertainties. In case of the borrower’s death, family members can use the death payout received from the term plan to pay off their home loan and ease the financial stress of the family.
A term insurance plan acts as a safety net for your loved ones when you are not around. This pure protection plan provides the much-required amount to meet the requirements in the unforeseen event of the life assured’s death. A term plan ensures that your loved ones are financially protected to pay off the debt. Following are the main benefits of purchasing term insurance for a home loan:
A term plan can provide a high cover at the best possible premium rates based on your needs and financial risk portfolio. The total life cover amount should be at least 10X the annual income over and above the house loan unpaid amount.
The premium amount for term insurance plans is lower as compared to other plans.
Apart from maximum coverage and affordable premium, a term plan allows you to update your plan with the changing financial requirements of your life. It helps you to change the coverage, premium, or term as per your changing needs.
The term riders are add-ons that can be attached or added to your base plan to enhance the coverage of your policy. The riders like terminal illness and partial/permanent disability can be availed at a low amount of additional premium.
You can get tax benefits on the premium amount as per the prevailing laws of the Income-tax act, 1961.
Securing your family members against the debt is the primary goal of your home loan-linked term insurance plan. Though home loan companies also provide home loan protection plans with a term plan, purchasing a sufficient amount of term plans has various benefits over a home loan protection plan.
Preferably, the life cover for your term plan opted for a home loan should be equivalent to 10X your yearly income + the amount of unpaid home loan.
For instance, if your yearly income is Rs. 7 Lakhs and the unpaid amount of your home loan is Rs. 30 Lakhs, then your sum assured amount should be 1 crore (7 Lakh X 10 = 70 Lakh + 30 Lakh). So, this amount will take care of all your family’s financial requirements in your absence.
You can select to purchase an HLPP i.e., Home Loan Protection Plan when you take a home loan from any financial institute. Though, it is not important that you purchase HLPP while availing a home loan. A term insurance policy for a home loan is the right choice and a good option for the one who is buying a home because of the below reasons:
The Premium amount is higher as compared to the home loan term plan. In the home loan term plan, the premium is paid in annual, quarterly, or monthly installments, whereas in HLPP, a one-time premium should be paid.
In the case of HLPP, the coverage decreases in direct proportion to the unpaid loan. So, as the unpaid loan is paid off, the coverage decreases until it becomes zero after the loan is fully paid off.
The death benefit stays the same during the entire policy tenure in a home loan term plan.
In the Home Loan Protection plan, you have no option to increase the cover if you increase the term of a home loan through a balance transfer or refinancing to another financial organization. There are no such difficulties with a term plan.
The dream of buying your own home has become possible with the help of a home loan. But it is important to consider the risks related to home loans and how a protection policy such as a term plan can help you. Purchasing a term insurance plan to protect your family against future uncertainties is a smart choice that you can make right now.
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