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A Guide To Protect Your Home Loan With Term Life Insurance

Do you have a home loan? If yes, a term insurance plan is the right choice for you. A term insurance plan offers a death benefit to the assigned nominee of the term policy on the death of the life assured. If you secure a sum that covers the loan amount as well as other financial aspects, you shall have enabled your family to deal with any financial emergencies after your death.

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Home loans are expensive and a long-term ordeal that requires extensive financial planning on your part. Although an important milestone, your dream home should not come at the cost of your family’s well being. If you want to ensure that the loan amount is paid off in your absence without any financial trouble to your loved ones, you should consider investing in a comprehensive term life insurance cover. 

Guide To Purchasing Term Life Insurance When You Have A Home Loan

Home loan linked term plans are designed to enable the family of the deceased policyholder to continue loan repayments and avoid defaults. The primary reasons for defaulting on home loans are threefold. The first is due to the loss of a job, the second is due to the death and/or disability of the policyholder, and the third reason can be attributed to the diagnosis of a critical or terminal illness. 

Here is a guide on choosing the best term insurance plan if you have an outstanding home loan. 

  1. Decide your budget

    Although term insurance plans are affordable, home loans are usually not. It is important that you do not stretch your pockets thin at the expense of your current living standards. Be sure to use term insurance premium calculators before purchasing a plan to compare the quotes of different policies. Pick a home loan linked term plan whose premium payments can be maintained along with the home loan EMI. One of the best features of term insurance is that it offers a lot of options in the policy term and premium paying term. This allows you to pick one that best fits your circumstances.

  2. Pick the coverage amount

    The next step requires you to decide the amount your family will need to pay off the loan amount and also take care of additional expenses arising out of daily needs. Experts advise buyers to purchase a cover that is at least 10 times their annual income. With a home loan, you should ideally add the outstanding amount to the term insurance cover to ensure a well-rounded figure. For instance, if your annual income is Rs. 10 Lakhs and you have a house loan of Rs. 50 Lakhs, your home loan linked term plan cover should be equal to Rs. 100 Lakhs plus Rs. 50 Lakhs, totaling Rs. 150 Lakhs. 

  3. Add riders to the base policy

    Riders can significantly reduce the financial burden on your family in the case of any eventuality. Term insurance plans come with various riders against accidental death, disability, critical illnesses, and terminal illnesses, etc. These can be availed by paying additional premiums. The extra benefits can be used to cover for loss of income due to any of the above-mentioned reasons and thereby avoid defaulting on loan payments. 

Home Loan Protection Plans versus Term Life Insurance Plans

Although some lenders may push you to include home loan protection plans to avoid defaulting on loans, choosing a term plan can offer similar benefits and then some. Here is a comparison of each of their distinguishing features to help you decide better. 

Feature Home Loan Protection Plans Term Life Insurance Plans
Description An insurance scheme wherein the insurer offers to settle the outstanding loan amount in the event that any misfortune was to befall on the applicant.   Term life insurance plan offers life cover for the policyholder and pays out a death benefit amount to the family on his/her death. 
Premiums It requires a one-time premium payment which tends to be higher than the cost of term plans.  Premiums are scheduled over a period of time, ensuring lower denominations which are easier on the pocket.
Life Cover Coverage reduce as the sanctioned home loan amount reduces with repayment; life cover reduces to zero at the end of the loan tenure. Coverage remains constant throughout the policy period. The total assured benefit is paid out on the death of the life assured within the policy term, irrespective of the outstanding loan amount.
Flexibility in Policy Term & Coverage As these plans require a one-time premium payment, modifications are not applicable. Changes in the home loan tenure do not affect the period of coverage under the home loan insurance plan. The coverage under home loan linked term policies can be modified at different stages of life, albeit with requisite riders. There is also the flexibility of premium payment over a period of time. 

Can Home Loan Protection Plans (HLPP) Be Converted To Pure Term Insurance Plan?

Home loan protection plans cannot be modified once the premium has been paid. This is one of its drawbacks when compared to term life insurance plans which come with a lot of flexibility. Since home loan insurance plans are linked to the loan amount, the coverage decreases with each EMI paid towards it. However, some insurers partnering with leading banks may allow provisions to switch an HLPP to a pure term insurance plan. You should ideally check with the insurer about the same. 

The Final Word!

To effectively avoid putting the financial burden of repaying the home loan on family members, applicants should invest in term insurance and include various riders against critical illnesses and accidental deaths. The death benefit proceeds from the home loan linked term insurance can be used to pay off the EMIs and also fund other expenses if the sum assured permits.

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