Home loan not without taking a cover
The responsibility of the repayment goes on to the co-borrower or the family members of the deceased borrower. In a normal situation, if the borrower was insured the family could use the claim proceeds to settle the loan. But what if that money is not sufficient? And if it is, then the family is left with just the home and no financial support.
Isn’t that a happy situation turned scary? It certainly is. Remember the simplest excuse you had to not avail insurance – one, ‘I am over insured!’ or two, ‘my tax planning for this year is complete’. But when you are borrowing, it’s much beyond the question of over or under insurance. It is also about tax planning.
What needs attention and action is the fact that you are creating a liability when you borrow for a home. You are probably not leaving them with an asset if that liability goes to your family in your absence. Here, a home loan protection plan comes to your rescue in case of an untoward situation in the future. Such an insurance policy helps in mitigating the financial risk in terms of the money you owe to your lender. The need for such a policy is very simple.
The money you borrowed has to be repaid by the surviving family member in case of your absence. If they don’t, the lender can take possession of the home.
What is it?
Under a home loan protection plan, the insurance company comes to repay the outstanding loan in case of the death of the insured borrower. This ensures that the family or dependents of the deceased are not left with the liability to repay the loan and also that the home is theirs. Because, the outstanding loan amount which the borrower owes to the lender is paid towards the full and final settlement of the loan amount.
For example, let’s assume that Mr X is taking a home loan for Rs 15 lakh. In the next two years he would have repaid Rs 3 lakh and Rs 12 lakh would be outstanding. However, at this point Mr. X meets with an accident. No one else in his family is employed and hence repaying the equated monthly installments (EMIs) is not possible.
In a scenario where Mr. X has no loan protection insurance cover, the family is at the risk of the lender re-possessing the house, which means that the family will be rendered homeless. However, if Mr. X had taken an insurance cover at the time of taking the loan, the lender would have claimed the outstanding Rs 12 lakh from the insurance company to foreclose (close prematurely) the loan of Mr. X.
How it works?
A home loan protection plan is similar to a term insurance policy, except that the insurance cover is linked to the loan repayment schedule. It means that the policy is for the period of the loan and also will be equivalent to the outstanding home loan amount at any given time during the loan tenure.
In exceptional cases, the coverage might not be on a reducing balance method, which means that the life cover is for the initial loan amount. In case the claim comes up, the insurance company pays the initial insured amount to the beneficiary irrespective of the then outstanding home loan amount.
What does it cost?
The premium for this type of insurance cover is calculated on the basis of the age of the borrower, the amount and the tenure of the loan being taken. The premium increases with the increase in age. The plans offered by some insurance companies also require the mandatory medical tests to be performed above the age of 40.
Below 40 years, some insurance companies accept a simple declaration which suffices the need of a medical test. The rates, owing to reducing cover are lower than that for individual term life insurance policies. However, the mode of premium is single premium – to be paid in advance – and hence the outgo is much higher.
Banks and home finance companies do club the insurance premium into the loan amount. So, for the borrower the protection cost is built into the EMI that he pays for the loan, including the insurance premium. Generally, the minimum age to get this policy is 18 years and the maximum age could be up to 50 years.
However, the cover is granted up to lower of the expiry of loan or 60 years. With some insurers, there is a cap on the maximum sum to be insured. HDFC Standard Life Insurance Company, for example, provides insurance only up to Rs 30 lakh.
Recently Syndicate Bank tied up with SBI Life Insurance, under a special scheme announced by the Government of India and Indian Bankers Association (IBA), to provide housing loan insurance cover to the home loan customers of the bank. Under the scheme, the home loan customers of the bank, in age group of 18-55 years, who avail of sbi home loan up to Rs 20 lakh would be eligible for the home loan cover at no additional cost, i.e. the premium for the cover would be borne by the bank.
How are claims settled?
In case of an eventuality, the proceeds of the insurance claims are paid to the lender directly or to the family member if the policy is not on a reducing balance principle. Many insurers have exclusions also. Some do not pay the claim if the cause of death is suicide within a year of the commencement of the policy.
Also, a few companies do not offer the insurance cover if death occurs within 45 days of the commencement of the insurance policy, unless the death is due to an accident.
You must remember…
Although, such policies are not mandatory, they are advised to be taken. Simply because, the family in case of the borrower’s death is not put into financial distress and has a home to live in without its liability. But, if the borrower prepays the loan earlier than the schedule, the cover gets over.
Remember, this is identical to a term policy without the return of premium.
The borrower will not get back the premium paid if he lives beyond the loan repayment term. One must also check what the loan insurance covers, whether it covers death by accident or death by any cause or temporary disability only or does it cover permanent disability as well.
For those who have an ongoing loan, it is difficult to buy a home loan protection plan. But a term insurance policy is never out of hand. One insurance policy, exclusively meant to take care of your financial liability, will never be an unwise decision. And in any of the situations, the premium you pay brings you tax benefits too.
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