Buying a new house is a dream for many people. However, they do not have enough funds to achieve this goal. So, they consider taking a home loan.
If you manage the repayment of your home loan effectively, then this financial product can be the best way to help you own a house. While applying for a housing loan, the loan provider asks you for a guarantee or urges you to purchase a home loan insurance plan. Commonly, people use the housing property as the guarantee or collateral. However, you also have the choice of covering the home loan with term insurance. Your housing loan provider may persuade you to purchase a home loan insurance plan. In such a situation, it is time to consider the advantages and disadvantages of a home loan insurance plan and a term policy before making any decision.
House loan insurance and term policies safeguard the borrower from the untimely eventualities of life. Let us understand these plans better.
What is home loan insurance?
The home loan provider or any of its partner companies offer a house loan insurance policy as a single premium plan. Such a plan protects the borrower from any risks due to which he or she is unable to repay the borrowed sum on time. The risks include disability, job loss, and the untimely death of the borrower. If a person has a house loan protection plan, it is the insurer’s responsibility to pay the outstanding liabilities in case the borrower dies or becomes disabled. The coverage that such a plan provides is equivalent to the home loan amount. You can also opt for a decreasing coverage house loan insurance plan. Here, the sum assured will keep reducing as and when you repay the loan.
What is a term plan?
A term insurance policy is a pure protection plan that secures the financial future of the policyholder’s family if he or she dies during the policy period. Here, the nominees of the policy receive the death benefit (sum assured). They can utilize the sum assured to repay the outstanding debts, manage household expenses, fund children’s education, purchase a new property, or for any other purpose.
In a term plan, the sum assured plays a crucial role because it has to meet the vivid financial needs of the policyholder’s family. So, while considering the term plan’s sum assured, it is advisable to follow a thumb rule. You can opt for a sum assured that is around 15 to 20 times your annual income. The term insurance age limit is capped between 18 to 65. So, you need to select an amount according to your growing needs or financial responsibilities. It is important to ensure that this amount is adequate to support your family if you are no longer around.
Another important plus point of a term plan is that you can purchase riders by paying supplementary charges over and above the basic premium. Riders can widen the scope of the policy and increase the sum assured. Besides pure term plans, you can consider investing in other variants like term policies with increasing life cover or decreasing life cover.
Which of the two is a better alternative?
Both the insurance plans have the same purpose of providing financial security to the borrower against the loan repayment risks. If you own an online term insurance policy with a high sum assured that covers the borrowed amount, then you may not buy any house loan insurance plan. However, if the sum assured of your online term insurance plan is less than your loan amount, then you may have to consider buying a home loan protection plan. It is because if your family uses the life cover of the term plan to repay the debts, they will be left with nothing.
You need to weigh your options carefully by considering the various factors like the premium, scope of coverage, and tax benefits to evaluate which one of these choices can meet your needs.