Term Insurance 485 views January 6, 2021

How Will a Term Insurance Plan Help in Your Home Loan?

Owning a home remains the wish of many but very few become a homeowner these days. Reasons for a few homeowners include the surging property prices, failing to meet the home loan eligibility norms owing to irregular income, etc. But if you do manage to buy a home with a home loan, you should have a backup plan too just in case something goes wrong later. So what could go wrong? You might succumb to unfortunate incidents like death or loss of job due to critical illness or permanent disability due to an accident, during the course of paying a home loan. At that time, either your family will need to pay the remaining loan balance or lose the home if they fail to do so. But if you have a term insurance plan, you can prevent such outcomes.

With a term plan, your family members will receive the sum assured as chosen at the time of choosing the policy, in case you die during the policy term. The sum assured amount will help your family members clear off the home loan debt and maintain homeownership. Let’s read further to know more about the utility of term insurance plans regarding a home loan.

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So How Much Sum Assured Should You Have When Buying a Term Insurance Plan to Cover Your Home Loan?

Deciding the sum assured to cover against unfortunate circumstances of life itself is a bit tricky because one can’t predict how inflation will shape up later. Plus when you look to cover your home loan with a term plan, the decision-making process needs to be even better. Not only do you need to keep an eye on the outstanding home loan balance year wise but also your family requirements in your absence.

You could check the estimated home loan outstanding balance at the end of every year using the Home Loan EMI Calculator online. All you need to do is enter the loan amount, interest rate and tenure in the calculator. After that, you could see the outstanding balance year wise. That could give you a fair idea of the sum assured you should have.

Also factor in your family requirements when deciding the sum assured. Because getting rid of home loan obligations should not be the sole concern for your family members in your absence. You need to ensure that their other needs get fulfilled too with a term insurance plan. Inevitably, the sum assured amount will go up and so will the premium.

Let’s just go back to the basics of term insurance plans for a while. A term insurance plan comes into the picture mainly when you die during the policy term. In case you are diagnosed with a critical illness or succumb to permanent disability over time and want a cover for the same, you will need to add these riders to your term plan. With these additions, you will get an extra sum insured beyond the base sum insured.

Yes, the overall premium will go up, but that makes sense as such eventualities can take place. And if they do, paying the home loan will be difficult without such riders to your plan.

Banks/Housing Finance Companies Offer Home Loan Protection Plans – But are They Better Than a Term Insurance Plan?

Most banks and housing finance companies while offering you a home loan requests you to accept a protection plan for the said credit too. But if they are telling you that it is mandatory to accept a home loan protection plan, it’s not true! You can complain about it to the Banking Ombudsman and stop the lender from attaching such a plan to your home loan.

But since we have popped out this home loan protection plan, it is worthwhile to compare it with a term insurance plan based on certain factors. Let’s compare to see whether this protection plan is worth having.

Premium Outgo

Since a home loan protection plan attaches the one-time premium payment with the home loan quantum, the overall premium outgo will be much more. You may not realize it as the premium is part of the home loan amount. You will pay the interest on the home loan amount as well as the premium amount. In comparison, in a term plan, you can choose to pay the premium at any of the monthly, quarterly, half-yearly or annual intervals.

Type of Cover

Term insurance plans can come with level, increasing and reducing covers. With the level cover, your nominee can get the sum assured as chosen at policy inception upon your death. The increasing cover means the sum assured will increase by a specified amount and works exactly the opposite to that of decreasing life insurance where the sum assured decreases. In the case of home loan protection plans, decreasing cover applies. So, the sum assured here reduces as the outstanding loan balance reduces.

From the above two points, a term insurance plan fares better than a home loan protection plan both in terms of cost and flexibility.

Conclusion

As you could see how a term insurance plan can act as a backup cover for your home loan in case you meet with unfortunate incidents. So, when you choose a term insurance plan and have a running home loan, go for a higher sum assured if you can pay the required premium. While choosing the sum assured amount, factor in the current inflation and increase it by 5-6% every year. All that will help you choose the optimal sum assured.

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