Get that home loan insurance cover now!

When individuals opt for a home loan, they enter into a long-term commitment with a housing finance company (HFC) to fulfil a financial obligation towards the HFC. Therefore they need to ensure that come what may, the obligation is honoured.

And for this they also need to plan for any unforeseen eventuality. This includes insuring their lives. The survivors, many a times, have to go through a lot of hardships in the absence of the wage earner.

Here, we present a case in favour of individuals insuring themselves so as to ensure that home loan.

In insurance parlance an insurance policy which covers a home loan, is known as 'loan cover term assurance policy'. Such a policy covers the individual's home loan amount in case of an eventuality. The cover on such a policy keeps reducing with the passage of time as individuals keep paying their EMIs (equated monthly instalments) regularly, which reduces the loan amount.

HFCs generally have a tie-up with a life insurance company for interested individuals. These HFCs give individuals an option of covering the home loan amount by way of a home loan term assurance policy from the said insurance company.

Some HFCs also offer an added advantage of clubbing the premium amount with the EMI. This is a convenience for borrowers, as they don't have to worry about buying a separate insurance cover. And they get tax benefits on the insurance cover too in addition to the home loan tax benefits.

However, individuals should look at various options available to them while considering life insurance to cover their home loan. While it is true that the insurance-home loan tie-up offers convenience to the borrower, most insurance companies offer the single premium or the 'limited premium paying term' plan to home loan seekers. This may prove to be a costly affair in the long run for the borrower. An illustration will make things easier to comprehend.

Term Plan: A cheaper option

Suppose an individual, aged 30 years, decides to opt for a home loan with A Ltd. A Ltd also offers him a loan cover term assurance plan from its affiliate life insurance company, B Ltd. As can be seen from the table, the home loan is for Rs 2,000,000 for a 15-year tenure.

If the individual were to buy loan cover insurance from B Ltd, his premium would be Rs 8,630 and the premium-paying term would be 10 years. The term is 10 years because in case of regular premium payment with B Ltd, the premium is to be paid for only the first 2/3rd of the term while the cover continues for the full term.

Now compare this with a term plan from another insurance company, C Ltd for the same sum assured spread over the entire home loan tenure. This would of course, be a normal term plan for 15 years in our illustration. The premium works out to Rs 4,800. That's a saving of Rs 3,830 each year. And that's not where the comparison ends.

Make your savings work for you

Simplistic back-of-the-envelope calculations tell us that if the savings (i.e. Rs 3,830 p.a.) were to give us a return of around 7%-8% p.a. over a 10-year period (which is the period for which an individual would have paid insurance premiums with B Ltd), individuals would stand to benefit further from the trade off.

Limited premium payments are not favourable on one more count – it has been observed that home loan borrowers pay off the home loan well within the tenure; in our example within 10-12 years.

LPP collects premiums for the entire home loan tenure over a shortened time-span. In such a scenario, individuals need life insurance cover only for the time they are actually with their HFC and not for the entire home loan tenure. (There are some HFCs though who offer full cover till the end of the specified tenure subject to certain conditions). The same is the case with single premium payments, which collect premium for the entire home loan tenure in one go.

A lot of individuals are also under the illusion that if they are sufficiently covered (i.e. if they have adequate life insurance cover), they don't need to insure themselves further just to cover the loan amount. What they need to understand is that the current life insurance cover was actually meant to serve a different purpose like retirement or financial needs of the family in their absence.

In case of an eventuality, the survivors could be put through a lot of financial stress to make ends meet as well as pay off the outstanding home loan amount. And it wouldn't hurt the HFC to sell the property to recover the dues in case of a loan payment default. This alone makes a case for individuals to consider buying a term plan/loan cover term assurance.

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