Buying a own house is one of the important aim of nearly every Indian family. The common selection for financing your house is choosing a home loan option. But, what in case something unfortunate happens to you before paying the complete loan? The debt or loan repayment is passed on to your family. So, do you want to leave your family under financial stress? House buyers have 2 options – one is to avail of a home loan along with a home loan insurance or buy a term insurance plan.Read more
A term insurance plan secures your loved ones for the tenure of the home loan. If something unforeseen happens to you in that time, the death benefit from the plan can be used to pay the rest of the amount. On the other hand, home loan insurance protects your loved ones from unfortunate events by settling the unpaid home loan.
To understand this concept in detail, let’s discuss two types of insurance: term insurance and home loan insurance – and their pros and cons that will help you in making a wise decision about staying financially secured.
Home Loan Insurance (HLI) is also called Home Loan Protection Plan (HLPP). This is a plan introduced by almost every financial/lending institution in which the insurance company pays the unsettled balance amount of their home loan to the lender or bank if the debtor dies because of unexpected circumstances. In this, the term of the plan and the loan is generally the same. So, by buying a home loan insurance plan, borrowers make sure that their loved ones will not have to pay the home loan because of non-payment of the balance of the loan after their demise.
Term insurance is a pure life insurance product that offers financial stability and protection to the policyholder for a specific time period. In the case of the policyholder’s death during the policy term, the nominee/beneficiary receives a death payout as defined under the chosen term plan.
For instance: The premium amount for Rs. 1 Crore Term cover could be as minimum as Rs. 500 per month. This fixed amount of premium can be paid once or at regular intervals of time for the entire policy tenure or for a limited time. Premiums vary based on the premium payment type opted by the policy buyer.
The two protection policies that can secure the borrower from the risk of non-repayment are beneficial for both the borrower and the lender. Let’s discuss some of the important differences associated with term insurance and home loan insurance:
Premium amounts are paid in a lump sum form for a home loan insurance plan. This 1-time payment makes the rates of premium higher than other plans. Also, the premium amount for home loan insurance plan is added to the amount of the home loan. Premiums of a term plan are lesser than home loan insurance. A term insurance calculator is used to calculate the premiums and it is paid yearly, bi-yearly, quarterly, or on a monthly basis. So, a term plan is much more economical than home loan insurance.
The term plan provides financial coverage for a fixed period of a lifetime and if the insured passes away within the fixed time, then the death benefit is paid to the beneficiaries in a lump sum form with which your loved ones can repay the home loans. After the policyholder’s death, the term plan can settle any type of unpaid debt, thus securing the loved ones from the unexpected financial stress of paying the loan back. This decreases the risk of experiencing bad debts as the term plan will discharge the unpaid liabilities.
On the other hand, the home loan insurance covers the debtor for the duration of repaying the loan. This insurance expires when the unpaid loan amount has been paid. Similarly, the coverage amount reduced as the loan amount gets repaid. In case the debtor passes away within this tenure, then the loved ones can claim the loan insurance to pay off the unpaid amount of loan.
According to section 80C of ITA, a tax-payer can file a claim of deduction of up to 1.5 Lacs from the taxable salary. A policyholder availing term plan is eligible for this tax deduction. Home loan insurance provides the same tax savings benefit u/s 80C as the home loan premium amount is added to the home loan. This majorly depends on the term insurance tenure and the home loan to assess the tenure of the tax benefits.
Both protection plans, term insurance, and home loan insurance have rider benefits that cover specific conditions such as accidental deaths, critical illness, and job loss. These term riders increase the insurance plans. So, the home loan insurance plans with these riders typically have a higher price than the basic plans.
After discussing all the pointers discussed above, it is clear that the decision of choosing a specific plan solely depends on the financial needs of an individual. However, various experts suggest term insurance over a home loan protection plan, as the previous one offers large cover, maximum flexibility, and helps the family of the borrower to face financial liabilities in the future.
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