To have a house of your own is a dream we all nurture, and to make this dream come true we all work hard for years, and get ourselves a home loan. While home loan helps us tremendously in getting a step closer to our dream home, it can also be a huge liability on the family.
What this means:
Let’s take an example of Mr. Rahul Singhal. He is a manager at an MNC and is the only earning member in his family. He has a loving wife and a two year old daughter. He has just availed a home loan for Rs 60 lakh which he plans to repay in monthly installments of Rs 60,000 for a period of 20years.
But imagine if something were to happen to Rahul, the responsibility of repaying this home loan will fall directly on his family which would place them under tremendous economic strain.
But if Rahul took a life insurance cover (with disability benefit) which is equivalent to or higher than the loan amount, this life cover will take care of his outstanding home loan amount in case of any mishap that leads to disability or death. Under this protection plan, the dependents/ legal heirs will not have to fret over repayment of EMIs as this can be taken care using the proceeds received from the life insurance company.
Financial experts recommend a life cover since the premium is low and the cover is available for a tenure of up to 25-30 years. In case the borrower dies or has a fateful incident that leaves him/her unemployed due to disability, the entire cover money, which is equivalent to the loan amount, is handed over to the borrower/ borrower’s family. This amount can then be used to repay the outstanding loan amount.
There are two types of protection plans that can primarily help you reduce this risk:
Mortgage Redemption Policies
Under this plan, the life cover reduces as the outstanding principal amount comes down. Such policies are bundled into the loan you avail, and cover you for the period of the loan. The amount of coverage keeps reducing as you pay the EMIs. By the end of the tenure of the loan, the sum assured becomes zero. Such products are generally single premium policies that are added to your loan amount.
Pure/ Level Term Plans
Under this plan, the life cover on the loan amount remains constant for the entire duration of the plan. Term plans gives you life cover for a specified period of time. Generally the premiums for Term plans are quite low compared to other Life Insurance products.
Related article: Term Plans for dummies
Benefits of term plan over mortgage redemption policies:
• In case of the death of policy holder (loan payer), the sum assured is handed over to the beneficiary of the policy. The beneficiary can then use the money to settle the home loan with the bank.
• Tax benefits under Section 80C.
• By paying a slightly higher premium amount, you can choose to include other riders in your life cover such as disability and critical illness.
• Even in case of more than one borrower, a single life cover suffices. You do not have to buy separate life cover plans for each borrower.
• Can be easily bought online
What you must know:
• It is not mandatory for you to get a life cover on your home loan. There is no RBI or IRDAI regulation or guideline that makes this compulsory for banks to impose on you, along with a home loan.
• If you opt for a single premium Mortgage redemption policy, under which you club the premium amount with the loan amount, you do not get any tax benefits on the premium paid.
• Under Mortgage Redemption policy In case the loan is transferred to another bank or foreclosed, the borrower may lose part or entire premium amount. This varies depending on the policy provider.
Financial security, even when you are not around, is the biggest gift you can offer your family. This will not only ensure their well-being but also give them a life they deserve.
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Parting from a loved one is always difficult and there is no parting more difficult and grievous than the one that comes with death. However, even in such unfortunate circumstances, there are certain obligations that you need to fulfil.