Having a home is a dream for many Indian people. But due to the rising real estate and construction costs, it is becoming highly difficult to purchase a home without a loan. The home loan market is growing every year and stood at Rs.11.5 trillion as of March 2009. The CAGR growth rate has been around 16% over the past 6 years. Keeping this in mind many banks and NBFCs have cut the interest rate payable on the home loan.
Most numbers of the loans are being availed by the people in the metro cities while the tier 2 cities are giving tough competition to the metro cities. At the time of giving loans banks and other financial institutions ask for insurance to cover the loan in case of the death of the insured or in case of the customer not being able to pay the installments.
Life insurance is a type of insurance that pays out a pre-determined amount to beneficiaries when the insured individual dies. It can be taken out as part of a mortgage or home loan. The life insurance policy will cover the outstanding balance on the mortgage or home loan in case of death and also pay any outstanding interest.
But it is important to choose a life insurance policy with enough coverage to cover all debts, including mortgages and loans, so that there are no outstanding financial commitments left behind. The most important thing to remember when buying life insurance is to make sure that you are getting the right type of policy for your needs.
There are many different types of life insurance policies for home loans available and each one has different features and benefits. It’s important to understand these differences so that you can find the best deal for your specific needs. This article will give you an overview of the different types of life insurance for a home loan, the benefits, and how to get it.
What is Life Insurance for a Home Loan?
Life insurance for a home loan is a type of life insurance policy that covers the death of the borrower and pays off the outstanding mortgage balance on the property. Most companies offer this type of coverage to allow borrowers to repay their mortgage debt in case something unfortunate happens to them or a family member.
This is a type of life insurance that pays off your home loan if you die. It usually only covers your outstanding mortgage balance, so you will want to make sure that all other debts are paid off before you take out this kind of policy.
Why Do I Need Life Insurance for Home Loan?
Life insurance is a type of insurance that protects an individual’s family in case the individual dies. It is a contract between an insured person and an insurer. The insurer agrees to pay a sum of money to the insured person’s beneficiaries if the insured person dies during the term of the life insurance policy.
The purpose of life insurance for home loans is to cover any outstanding mortgage balance in case you die before your mortgage is repaid. Insurance for home loans can be used for both purchases and refinance, as well as reverse mortgages. You need life insurance for home loans because without it if you die before your mortgage is paid off, your family will have to come up with the money to pay off your remaining mortgage balance or sell their house.
Term Life Insurance for Home Loan
When it comes to using a life insurance cover to protect against home loans term life insurance is the best when compared to other forms of life insurance. The main reason is that term plans are cheap, and the benefits offered are multiple times higher compared to other types of life insurance. A term insurance plan can be used to cover a home loan as well as for managing other financial needs of the insured’s dependents.
Below are the types of insurance offered under Mortgage insurance:-
1. Decreasing Term Insurance:
The decreasing term assurance plan is the most common type of Mortgage insurance offered to customers. In this type of insurance, the sum assured would be the same or more than the loan sanctioned, and each month the sum assured would be decreasing corresponding to the loan. Since the loan outstanding decreases each year, the sum assured in the mortgage insurance also decreases.
At any point time during the period of the mortgage, the sum assured would not be less than the outstanding loan amount. This is the cheapest option available under Mortgage insurance and is considered to be the most effective and suitable mortgage insurance option.
In case of the death of the loan customer, the claim procedure can be utilized to settle the loan outstanding, and the remaining amount if any can be utilized by the beneficiaries. This helps the family of the deceased to sail through the difficult times and have their dream home with them. This type of product is offered only by the Life insurance companies under their Group Mortgage insurance.
2. Critical Illness + Personal Accident + Loss of Job:
Since the term insurance cannot be offered by the general insurance companies, they have come up with an idea to provide a combo product to the loan customers of banks and other financial institutions. This combo product includes coverage for Critical Illness, Personal Accident, and Loss of Job. Let us understand the coverage provided under each section of this combo product.
Critical Illness
Critical illness can be defined as a life-threatening illness that leads to the death of a person in most cases. The cost of treatment associated with critical illness is way higher than the other diseases. A few examples of critical illnesses are Cancer, Heart attack, Severe burns etc.
If a loan customer expires due to any of the mentioned critical illnesses in the policy copy, the insurance company settles the amount to the bank to clear the outstanding loan amount. Remaining amount if any is paid to the beneficiaries of the deceased.
Personal Accident
Personal accident insurance is an agreement between the insurance company and the policyholder where the insurance company will provide financial compensation to the policyholder or his/her beneficiary in the event of accidental death or disability. In the mortgage insurance for any event such as death or disability, the loan customer would not be able to repay the loan. In such situations, the insurance company will settle the outstanding loan amount to the bank so that the beneficiaries can take possession of their dream home.
Loss of Job
Under this section, the insurance company compensated the policyholder with up to 3 months EMI in case of loss of job due to factors that are not in the hands of the policyholder. It is expected that the policyholder can secure another job within the 3 months. The claim is not payable if the customer loses the job due to underperformance, termination from the company, etc.
The Combo product doesn’t cover natural death while the decreasing term insurance doesn’t cover the EMI in case of loss of job. Each product has its advantages and disadvantages and it is upon the customer to select the best product within his budget.
Reasons to Choose Term Insurance for Home Loan
Term insurance is a kind of insurance that provides coverage for a specific period which protects the borrower and his family in case of death or disability. If the policyholder dies during this period, the insurance company pays out a sum of money to the beneficiary.
Below are the main reasons to buy term life insurance for a home loan
- High Coverage at Affordable Premiums: Term plans provide a high amount of coverage at a lower premium. So you can easily buy this policy. Moreover, the payout from the policy will enable your nominee to pay off the loan without any worries.
- Fixed Benefits: The main advantage of buying term insurance for home loan protection is that the nominee receives the full amount. The amount can then be used to pay off the lender of the home loan, and the remaining amount can be retained by the nominee.
- Switch Lender: When it comes to a term life insurance plan for a home loan, you can easily switch your current home loan from one lender to another lender.
- Tax Benefits: By paying a premium for term life insurance for home loan insurance, borrowers receive tax benefits under Sections 80C and 80D of the Income Tax Act.
Conclusion
A property purchase is a big investment, it’s essential to prepare yourself for the unexpected since you can't predict what will happen in the next few years. Secure your family's future by buying your home and protecting them from loan liabilities with life insurance. Compare the best life insurance quotes at PolicyBachat to get the best life insurance policy from the top life insurance companies.