Take Your Pick: Home Loan Insurance Vs Term Insurance Policy
As Will Rogers once eloquently put it, “A man who dies without adequate insurance should have to come back and see the mess he created”. This holds true for home loan insurance as well.
Home loan insurance is important, because until you fully repay the home loan amount, the lender legally owns the property. Until then, the original property papers remain in the custody of the bank.
This is why home loan borrowers fear the stroke of fate. You would not want the burden of your loan to fall on the shoulders of your loved ones in your absence, or because of an unfortunate incident.
If this bothers you, home loan insurance or term insurance is a panacea.
MakaaniQ tells you which one is best for you.
How does term insurance work?
Let us understand what “term insurance” means. Term insurance is taken for a fixed sum assured, which is the outstanding loan amount (incase of home loan insurance). You pay a premium every year during the term of the policy.
Now, in case you survive the duration of the policy, the policy will lapse and you will not get any share of the premium money. The premium money will go to the insurance company. Please note here that the duration of the insurance policy is equal to the remaining tenure of your outstanding home loan amount.
But, what if something unfortunate happens before the term of insurance policy ends?
Unfortunate as it is, if something happens to you, your family gets the sum assured (which can be equivalent, more or less than the outstanding home loan amount) from the insurance company. This money is paid to the lender to make the property free from the legal shackles of the bank. Also, if the outstanding loan amount is less than the sum assured by the insurance company, your family will get a refund that equals the excess money.
How is home loan insurance different from term insurance?
Have you ever wondered what would happen if the sum assured by the insurance company turns out to be less than the outstanding home loan amount if something unfortunate happens?
How about having an insurance policy in which the sum assured by the insurance company is equal to the outstanding liability of your home loan, which means, the outstanding amount of the principle component of the equated monthly instalment (EMI)?
We all understand that when we punctually pay our EMIs, the home loan burden reduces with time. As you approach the end of the fixed tenure of your home loan (which can be 15 or 20 or 30 years at maximum), you pay more and more towards the principal amount.
Home loan insurance is based on this fundamental principal.
Term insurance or Home loan insurance?
Home loan insurance was invented to safeguard home loan borrowers against unfortunate events. But it is sold with an intention to recover the home loan payments by imposing a one-time huge premium. The home loan amount is bundled with this single premium, on which you end up paying interest, to keep your home loan insurance going. This raises the cost of your credit.
Also, you will not be eligible for tax benefits because it is presumed that the home loan premium is being paid by your lender and not by you. The tax laws require you to pay the premium to avail of any tax benefit.
There are clauses attached even if you get your home loan transferred to a new lender.
In term insurance policy, you pay a fixed premium every year until the end of the tenure of the policy. This is not true of home loan insurance. You pay the single premium upfront in the case of home loan insurance. So, if you plan to pre-pay or close the home loan amount, you lose a large fraction of the money in case you had paid the single premium for home loan insurance.
And, in both term insurance and home loan insurance, if the home loan interest rates rise, the single or yearly premium will not be enough to cover the home loan amount. You will end up paying more.
Thus, as a home loan buyer, you must look into the immediate as well as long-term costs and benefits of such home loan insurance policies. Home loan insurance is not compulsory. Do not make the single premium payment upfront while taking a home loan. Be aware of the pros and cons. Do not blindly believe what you hear. Do not completely trust what your lender tells you.