Home loan protection defend your future
Buying a house is the single largest investment decision that nine out of 10 people ever make in their lives, and the way property prices have appreciated in the past few years, this statistic is likely to remain intact in the foreseeable future.
When one buys a home by availing a housing loan, it creates a big financial liability for the person. The situation becomes acute if one considers that in most cases, the person, who avails the home loan, is also the only earning member of the family. If under any circumstance this person were to pass away, his dependents would unfortunately inherit a huge financial liability with few means to provide for it. And if the survivors of the person are not in a position to pay the loan, the bank has the right to sell the house and recover its investment.
In light of such circumstances, home loan protection is emerging as an important tool to safeguard a home and dependents. A home loan protection plan is designed as an insurance policy, where, if the person who has taken the home loan dies (or is disabled causing loss of income), the insurance company will pay the remainder of the home loan.
How it works? Consider this, suppose if a borrower takes a home loan for Rs 60 lakh for a tenure of 20 years at an interest rate of 12 per cent. The EMI per month would be (approximately) Rs 66,065 per month. Assuming that he pays the EMI regularly for the next 10 years, the outstanding loan amount would reduce to Rs 45 lakh. If at this point, the borrower were to die (or incur a disability leading to loss of income) the housing loan protection insurance would pay the balance loan amount to the bank. The amount of payment paid under insurance will be the same as the balance outstanding on the home loan at the time of claim. Calculate EMI with Home Loan EMI Calculator
How is it structured? In many ways a housing loan protection plan is similar to term insurance in respect to paying options. Some of popular payment options are:
- Single premium payment: A single premium is paid while availing the insurance. Housing finance companies will try to club the amount payable towards a single premium with the home loan itself.
- EMI payments: EMIs (equated monthly instalments) are payments that can be made at fixed intervals (either monthly, quarterly or yearly). In this case too, the EMI to be paid, towards the insurance, is clubbed with the home loan EMI.
- Limited pay: An option where the insurance premium is payable only for a limited duration of the home loan tenure.
Other alternatives: Other insurance products can also be considered as an alternative to home loan protection insurance. A popular option available today is term insurance. On comparing the cost of a housing loan protection plan with term insurance, one finds that the cost of both is similar. However, term insurance offers the following benefits over housing loan protection insurance:
- The cover in a term insurance plan remains constant throughout the tenure of the loan; hence, the survivors will receive a fixed amount in the event of the death of breadwinner rather than a reduced amount.
- A fluctuation in the rate of interest may cause an extension on the home loan EMI schedule. You need to be certain that the home loan protection plan will cover such an extension in the tenure of the home loan. However, when you purchase a term insurance, you can factor the fluctuation and avail of an insurance plan with a higher tenure.
Irrespective of whether you decide to opt for a home loan protection plan or term insurance, it is vital that you have at least one insurance product that can cover your housing loan in case of sudden demise.
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