Home Loan Insurance vs. Term Insurance

Buying insurance is another important aspect of financial planning. To cover all your liabilities well in advance, it is essential to secure your family’s future. The type of insurance you choose highly depends upon your needs and affordability. This article looks over two types of plans: Home Loan Insurance and Term Insurance, both of which have been designed to provide financial security to your loved ones in case of a mishappening.

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Home Loan Insurance

Opting for a home loan before buying a house is common as it comes with several advantages. But what if you face a financial crisis during the home loan tenure for any reason? It could be job loss, sudden death or disability, or any other financial emergency that might demand high expenses. 

Such scenarios can even lead to missed payments attracting further penalties. Having home loan insurance helps during such a crisis.

A home loan insurance not only protects the lender’s interests but your dependents are also protected from any sudden financial burden. The insurance promises to repay the outstanding loan to the lender in case of unfortunate events during the loan tenure. 

It is generally provided by home loan lenders with a single premium payment option. This amount is most likely added to the home loan amount at an additional cost. However, some lenders ask for a separate premium payment. 

Even though a home loan insurance might look like an added cost, its benefits are unending and crucial.

Term Insurance

Term insurance is the most common type of insurance plan. They are pure protection plans with affordable premium rates offering coverage in case something happens to the policyholder during the policy tenure. Term plans offer a lump sum death benefit to the policyholder’s family/ nominee in case of the sudden demise of the policyholder. 

If the policyholder survives the tenure, no benefits are paid. Term insurance also offers tax benefits of up to INR 1.5 lakh under section 80C.

Term plans are usually of a fixed tenure. If you survive the term, you can either choose to extend the same plan or buy another. You also have the option of converting the term plan into a whole life cover insurance to assure complete financial coverage. The sum assured of term plans can be used for fulfilling financial requirements like loan repayment.

Understanding the Difference

Term insurance is different from home loan insurance as it offers overall coverage to the policyholder’s family. It is another way of ensuring that your loved ones don’t suffer a financial burden in case something happens to you during the home loan tenure.

Basis of Distinction  Home Loan Insurance  Term Insurance 
Premium Cost  It requires a one-time payment. Premiums are comparatively higher. Scheduled payments of lower value are made. Premiums are comparatively lower. 
Life Cover It covers the loan amount that has been sanctioned. As the loan is repaid, the life cover will decline and come done to zero at the end of the loan.    Term insurance is a cover that is payable on the death of the policyholder. They are used to repay the loans and act as an aid for the family in distress.  
Modification of the Cover The plan cannot be modified. If you opt for a higher tenure, the span for the home loan insurance remains the same.  In a term plan, there is an option to increase the cover. 
Difference in Premium  The premium cost gets added to the loan amount, and the interest charged includes the premium paid.   The premium of a term plan is much more affordable as compared to the Home Loan Insurance. 
Tax Benefits  The premium payments are added to the home loan amount thereby the tax deduction available under Section 80C of the Income Tax Act, 1961 increases. However, the period of the benefits shall depend on the period of the loan. (*Tax benefit is subject to changes in tax laws. Standard T&C apply.) Term insurance plan premiums are also available for tax benefits under Section 80C of the Income Tax Act, 1961. The period of the benefit can, however, vary.  (*Tax benefit is subject to changes in tax laws. Standard T&C apply.)
Add- Ons  The insurance plan comes with optional riders such as disabilities, terminal illness.   The premium for the add-ons is comparatively on the higher side.   Recently term plans also offer additional covers/ riders for terminal illnesses like cancer, cardiac issues as well as disability. 

Opting for any of the insurance covers is not mandatory but should be considered for additional financial protection. Term insurance is beneficial for a family’s financial independence, especially after the unforeseen demise of the only earning family member. Choosing between the two depends on the needs and circumstances of the individual in particular. A thorough analysis of your present situation along with probable risks should be done to arrive at an informed conclusion.

Types of Term Plans

FAQ's

  • A home loan protection plan has the following benefits: 
    • The premium payments are eligible for deduction under Section 80C of the Income Tax Act. 
    • In case of an unforeseen demise, the insurer repays the loan amount to the lender. 
    • The advantage of add-on riders can also be availed. 
  • It is not mandatory to purchase a home loan insurance plan. However, it is advisable to buy the same for future security. 
  • The following category of individuals should buy a term plan: 
    • Parents
    • Newly Married
    • Young Professionals
    • Taxpayers
    • Retired 
    • Self Employed Individuals
    • Working Women
  • The benefits of term insurance plans have been listed out underneath: 
    • Security for Loans and Liabilities 
    • Critical Illness Cover
    • Higher sum assured at affordable premiums
    • Tax Benefits 
    • Disability Support
    • Add on protection offers
    • Death Benefits 
    • Maturity Benefits 
    • Survival Benefits
  • The following payout options are available: 
    • Annual Payout
    • Monthly Payout
    • Lump-sum with increasing monthly
    • Lump-sum with monthly income 
  • The following factors decide the amount of insurance cover you need: 
    • Current income and expenses
    • Future financial goal for family and self
    • Current and future liabilities and assets
  • The following factors are to be considered before buying a term insurance plan: 
    • Company reliability 
    • Claim Settlement Ratio
    • Solvency ratio
    • Coverage offered
    • Premium waiver rider upon terminal illness diagnosis

Types of Term Plans

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