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What is a Home Loan Insurance Policy

One of the main priorities in life is a roof over one’s head. Buying that dream home is a must even if one has to avail a home loan to do so. Paying back the EMI on the home loan may take up most of one’s salary. Yet one somehow maintains the balance between his needs in these inflationary times and paying back those EMI’s. However a frightening thought comes to mind. What if one is not around to pay back the EMI’s on the home loan? What would happen if instead of transferring wealth one transfer’s a home loan liability to his spouse? Would that dream home be repossessed by the bank? These thoughts must be running through one’s mind.

What is a home loan insurance policy?

One of the main problems one faces in life is the rising interest rates on that home loan. But is this the only worry one has to face on that home loan? No definitely not. If one is not around to pay back those EMI’s in these rising inflationary times then the home loan liability is transferred to his spouse. A home loan insurance may be the solution. When one avails a home loan he pays a premium and obtains a home loan protection policy. This policy may be bundled mainly added along with the home loan and comes as a complete package. This also provides the insurance Company an assurance that the home loan would be paid back. If one avails a home loan of INR 35 Lakhs he would have to pay around INR 55000 for a home loan insurance policy over a 15 year period. One can avail deductions under Section 80 C on the premium paid up to INR 1 Lakh and if one passes away the lump sum amounts obtained are not taxed as per Section 10(10 D).

What are the shortfalls of a home loan insurance policy?

One needs to realize that a home loan insurance policy has a few pitfalls and he may have to analyze whether this product meets his needs.

  • One needs to realize that as he pays his EMI’s the home loan outstanding balance steadily comes down. If the home loan availed was INR 35 Lakhs for a 15 year tenure after a period of 10 years the home loan liability would be greatly reduced. The premium for the home loan insurance policy is high as it is paid for INR 35 Lakhs even though the home loan liability reduces with time. This basically means that one’s insurance cover or the sum assured depends directly on the home loan liability which decreases with time and yet a higher premium is paid. If one dies when the home loan amounts are almost paid back his dependents get nothing and only the home loan liability is settled.
  • One has to pay the entire premium in advance in case of a single premium home loan insurance policy. One may be offered a discount on this amount yet this is a loss. Why is this so? One would lose interest on the premium amounts as the entire amount is paid as a lump sum instead of in batches or installments.
  • If one opts for a single premium home loan insurance policy he pays the entire premium in advance. If one were to prepay his home loan and close it up much before time the premium would not be refunded and this would be a loss.
  • If one were to opt for a regular premium home loan insurance policy the premiums would be higher and in some cases easily be double the amount of a single premium home loan insurance policy.
  • One can avail tax deductions only if he pays the premium of the home loan insurance policy in full and the premiums are not paid by the Insurer. If the insurer pays the premium and one repays the premium bundled with the home loan through EMI’s he gets no tax benefits on the premium of the home loan insurance policy.

With so many shortfalls in a home loan insurance policy is there an alternate approach to solving this problem?

Is a term life insurance policy better than a home loan insurance policy?

A term insurance policy provides one a mortality cover or death benefit known as the sum assured in exchange for a premium. This is a policy very essential if one is at the start of his career and has dependents .But does this policy help if one has a home loan liability? Definitely Yes. In the case of a home loan insurance policy one’s insurance cover or the sum assured depends directly on the home loan liability which decreases with time. In contrast the level term life insurance policy provides one a constant sum assured across ones working life. If one were to die before the home loan liability is settled his nominee would get the sum assured and pay back the home loan amounts due to the bank.

Why is a term insurance policy better than a home loan insurance policy?

If one takes up a home loan insurance policy and passes away before the home loan is paid back the insurance Company would settle the dues. However ones dependents would be left with no money in the kitty. Compare this with a level term life insurance plan which provides a fixed protection across one’s lifetime at a premium much lesser than that of a home loan insurance policy. If one has an income of INR 6 lakhs per annum and an outstanding home loan of INR 25 Lakhs he needs to take a term life cover of 85 Lakhs .This is because one needs to insure himself for an amount equal to 10-12 times his annual income as well as add the home loan liability. If one were to die before the home loan liability is settled his spouse would get the sum assured of 85 Lakhs and would repay the home loan amounts due. The amount left behind would be enough for one’s spouse to enjoy life with a measure of comfort. This would help tide over a family crisis. One can also opt for a decreasing cover term life policy where the sum assured is equal to the loan amount. The term insurance policy is renewed with a lesser premium as the home loan liability decreases with time. One can save on the premium amount.

What are the rider benefits in a term life plan?

This policy can also be taken with rider benefits such as critical illness rider as well as accidental benefit rider where a lump sum is paid if one suffers a disability due to an accident or an amount provided if one suffers a critical illness such as a heart attack. These benefits are obtained on paying a slightly higher premium. One knows that the best time to purchase a term insurance policy is right now. This policy not only provides an income for ones dependents but also helps to retire debt mainly a home loan. If one avails a home loan there is no time to hesitate. Pick up a term life insurance policy right away.

Insurance
Term Insurance