Purchasing a home is a milestone for sure but in no manner a pocket-friendly feat. So, naturally, people rely on home loans that come with EMIs attached. But, what if the borrower passes away during the tenure of this loan? Without the bread-earner of the family, how do the loved ones manage the installments?
Well, there are 2 ways to bridge this financial gap -
- Opt for a term plan that covers your home loan or
- Get strong-armed into a home loan protector plan from your lender.
While you do have 2 options, given a choice, if you are looking for a protection plan that has flexibility, additional cover amount, and extends surplus protection for your loved ones, a term plan is the only way to go. Let us explain this in detail.
Home Loan Protector vs Term Insurance Plan Offering Home Loan Coverage
| Aspects | Home Loan Protector | Term Insurance Plan |
|---|---|---|
| Definition | A Home Loan Protector scheme is an insurance policy extended by your home loan provider to protect your loan in case you are unable to pay your EMIs (in the event of death or complete disability). This covers only your loan and nothing else. | A Term Insurance Policy is a financial protection tool that comes into play for your loved ones in case you pass away or are left incapacitated by disbursing a lumpsum (or staggered) amount. If the amount is significant, it can cover your EMIs and support your dependents for an extended period. |
| Premium Payment | Premiums are added to the home loan EMIs, leaving no need to make any upfront payment of the premiums. | Premiums are made by the insured on a yearly/monthly basis. |
| Flexibility | Home loan Protector plans are unaffected by any changes introduced to the tenure of the home loan. Porting them is a near-hassle and no modifications are possible. | Term Insurance policies can be modified, provided you have added the required riders. The premiums can also be waived if you are left incapacitated (with riders). |
| Coverage | Home Loan Protectors are solely availed to meet the home loan EMIs and no additional coverage amount is available. | If you calculate the term insurance cover well with a free term insurance cover calculator tool, (include your loans, monthly expenses, life-stage requirements, and inflation), your family will have a substantial amount set aside even after paying off the lender. |
Why do you need a Term Insurance Plan offering Home Loan Coverage?
Home loans are secured, long-term loans that require collateral. Since the loan amount is significantly large, the EMIs are not exactly very easy to pay off. Not unless you have a steady source of income. If the borrower passes away and the family loses this financial stability, they need access to a lump sum amount to meet the EMIs, or else they risk losing their collateral - which in most cases is the home itself.
Catering to this, term insurance plans are the perfect fit to cover home loan payments and here’s why -
- Term insurance policies = high coverage at affordable premiums
Say, you are a 25-year-old, non-smoker seeking ₹2 crore coverage till you are 60 years old. Based on the term insurance provider you opt for, you are looking at a yearly premium of ₹16k - ₹20k.
So, you have access to a premium financial protection tool at affordable charges.
2. Term insurance offers additional protection
If we take on the last example we cited, think of this - your coverage amount not only meets the entire home loan payment (either in EMIs or as a single payout, as you choose) but also leaves you with plenty to meet your life stage requirements and any future financial needs.
3. Term insurance plans offer staggered or lumpsum disbursal, as pre-decided
Imagine, Ashmit opts for a home loan and purchases his dream house, knowing completely well that his current employment and career course will be sufficient to meet his monthly EMIs. However, unfortunately, a few years down the line, due to a critical illness, he is unable to continue with his job and the family loses the constant source of income.
Now, without continued employment, how can he pay off his home loan EMIs, while they handle treatment charges and their household expenses?
Well, if he has opted for a term insurance plan with apt riders (Critical Illness Rider and Waiver of Premium), he will
- Receive a staggered/lumpsum amount, and
- Won’t have to pay the premiums towards his term insurance plan
The amount received from the insurer can then be used to pay off the loan amount and he can still keep aside a substantial amount for treatment charges, household expenses, and future requirements.
4. Term insurance policies offer an additional tax benefit
When you opt for a term insurance plan to cover your home loan, you also enjoy the tax benefits under
| Section 80C | Up to ₹1.5 lakhs/year on the taxable income on principal repayment in the loan and the term insurance premium. |
| Section 24(b) | Up to ₹2 lakhs/year on the interest component of the home loan (provided the home is self-occupied and the home construction has been completed within 5 years, else the deduction is reduced to ₹30k/year). |
| Section 80EEA | Up to ₹1.5 lakhs/year on the interest component of the home loan for 1st-time homeowners (provided the stamp duty value of the property doesn’t exceed ₹45 lakhs). This is in addition to the existing tax benefits available under Section 24(b). The property has to be bought between April 2019 and March 2022. |
While the perks of opting for term insurance for home loan coverage are crystal clear, there is yet another option that you need to consider.
Home Loan Protector/Insurance for Home Loan Coverage
Imagine this -
You walk into an NBFC to purchase a home loan plan. Your application gets easy approval since you meet all their required eligibility criteria.
However, once the formalities are done, your lender starts insisting that you take an insurance protector for your home loan.
You try explaining that you have a term insurance policy with ample coverage that would cover your home loan EMIs in any unfortunate situation (since you are smart). But, the lender is adamant because they have a tie-up with a general insurance company.
You walk out of the NBFC with your expected home loan and unexpected insurance protector. This protector is a Home Loan Protector that is meant to safeguard your loan repayments in case of your unfortunate demise. While some lenders mandate it, others merely suggest the same.
So, given a choice, should you at all opt for it? Let’s find out -
PROS:
- Streamlined repayment procedure: In the case of a Home Loan Protector, the sum insured directly feeds to your home loan EMI, leaving no need for your intervention. The streamlined process mitigates any time-lapse and ensures efficient management of your loan repayment, irrespective of whether you are present or not.
- No need for an upfront payment: The premium of your Home Loan Protector is added to your home loan EMIs. Thus you don’t need to pay a separate premium for your cover.
CONS:
- Limited flexibility for porting: What happens if you want to switch your lender or modify any terms on your loan? Since both your Home Loan and its protector are from the same lender, any request for portability becomes a hassle.
- No additional sum is available: The sole purpose of your Home Loan Protector is to meet the home loan EMIs, hence the cover is decided accordingly. Hence, though you have a cover plan, your family does not have access to any amount for their future needs, nor do you have a fund to fall back on if you are left incapacitated due to an accident.
So, if given a chance, do not opt for a Home Loan Protector to meet your loan EMIs, rather go for a comprehensive term insurance policy. On the other hand, if a lender tries to force you to avail of a Loan Protector plan, try to switch lenders, else, you don’t have an option.
How can you secure your home loan with term insurance plans?
STEP 1: Analyse your financial bandwidth
If you take a term plan for your home loan, you will be juggling a lot of expenditures across a year/month - household expenses, home loan EMIs, term insurance premiums, health insurance premiums (hopefully), and more.
So please make sure that your yearly income has the bandwidth to support this diverse list of expenses.
STEP 2: Calculate your coverage amount for the term insurance plan
Use a free term insurance cover calculator, or reach out to an expert advisor and decide upon the term cover that would encompass all your future requirements
STEP 3: Introduce value-adding riders to your plan
Typically term insurance providers offer multiple riders -
- Waiver of premium
- Return of premium
- Critical illness rider
- Increase/decrease the cover amount
- Terminal illness rider
- Life stage benefit
- Accidental death benefit
While all the riders are pocket-friendly, not all of them add value to your plan. Decide upon the ones that would help you meet the loan repayment requirements and add them to your plan.
TIP: Think of the Married Women's Property (MWP) Act for Added Protection.
Benny opts for a Home Loan from XYZ Bank in 2021. The home that he is building, is his collateral. Unfortunately, a year later, he passes away. His spouse is now worried that they will lose the home for which they took out the loan and will be hounded by the bank for the EMI payments.
But, Benny had opted for the Married Women's Property (MWP) Act. so, his wife is now in possession of the home and she can’t be pursued for the EMIs since they were her husband’s debts.
Conclusion
A comprehensive term insurance plan with value-adding riders is the best way to secure your home loan. So, if your current lender insists on a mandatory Home Loan Protection tool and it's not ideal, consider switching lenders; because home loans are long-term financial commitments and if the borrower passes away, the family will be left with just one cover to meet the EMIs and no protection tools to financially replace you.