There is always a risk of non-payment of the loan involved. Hence it is crucial for the borrower to cover the risk of non-payment. Otherwise, the liability of repayment falls on the family members.
The desire to build a home has become possible for many with easily accessible home loans. The home loan has a low-interest rate and tax benefits, making it a popular credit tool preferred by most home buyers. Although a home loan helps you realize the dream of having your own house, it comes with a responsibility to repay the loan.
The two common reasons for non-payment are the sudden demise of the borrower and loss of income due to critical illness or permanent disability because of an accident. In both cases, if the risk of non-payment is not covered and the loan EMIs remain unpaid for a long duration, the lender has the right to cease the property as a mortgage.
How to use Term Insurance to cover home loan risks?
Term insurance comes to the rescue when you need the home loan risk cover. The cheapest life insurance provides high coverage at a low cost. Most financial planners also recommend having term insurance if you have a home loan. It protects the family from the liability of home loan repayment in case of the sudden demise of the borrower. The home loan linked term insurance is ideal for covering the risk of huge home loans. Here is how you can use term insurance to cover your home loan risk:
Add home loan value to term plan cover -
Normally, term plans should be at least 10 times your annual income, which may not be sufficient to cover the home loan value. Therefore, while purchasing the term insurance, add the home loan value to the term insurance cover to ensure that your family has enough funds to pay the debt as well as fulfil all financial goals.
Home loan linked term plan -
If you already have a term insurance plan, you can add an additional blanket to cover the home loan risk. You can invest in the home loan linked term plan, also called decreasing term insurance. In such a plan, the sum assured keeps decreasing with the home loan payment. Because of the decreasing sum assured, such a plan has a low premium.
Additional riders -
You can use add-on benefits of term insurance if you cannot repay the loan due to income loss due to critical illness or a disability due to an accident. Riders like critical illness and accidental benefit offer a lumpsum amount that you can use to cover the cost of your treatment as well as repayment of the loan.
Longer tenure than home loan -
Ensure that your term plan has a longer tenure than your home loan so that it can cover the home loan risk in case of uncertainty.
Which is better, the protection plan for Home loans or the Term plan for home loans?
- The protection plan for the Home loan premium is higher than the term plan. Also, the premium for the protection plan of the Home loan must be paid once, unlike in the term plan, where premiums can be paid in monthly, quarterly or annual instalments.
- In the protection plan of Home, loan coverage decreases with the loan outstanding and becomes zero when the loan is repaid in full. However, in the term plan, benefits after death remain unchanged.
- In the protection plan of a Home loan, the cover can not be increased with an increase in terms of the plan. On the other hand, term plans do not have any such restrictions.
Considering all the facts, it can be concluded that the term plan is a must for the family's financial protection. It not only takes care of future financial needs but also helps in covering home loan risks. A good base plan with additional benefits sufficiently covers all types of risks. It is far easier to manage a single policy than to have different plans for different risks. A term insurance plan also offers tax benefits on the premiums you pay. So invest in a term plan to secure your dream of owning a home.