When we take out a home loan to purchase a house, we usually plan for a smooth repayment process. However, what happens if the primary earner faces unexpected circumstances? How can the loan be repaid then? Should the house be sold? It is essential to consider the risks involved when taking out a loan to protect family members from financial difficulties.
Taking on a loan entails the responsibility of repaying it. However, not all situations are predictable. This is why attaching an insurance policy to the loan is crucial, ensuring that it can be repaid in the event of unforeseen circumstances.
This principle should apply to all types of loans, including home loans, highlighting its importance in comprehensive financial planning.
These insurance policies can help cover loans when the borrower is no longer able to do so. Many banks offer loan cover term policies through their affiliated insurance companies when granting loans, sometimes even financing the insurance itself.
Understanding Loan Protection Plans
A home loan is typically a long-term contract spanning 20 years or more. A significant portion—usually 25-40%—of monthly income goes towards its repayment. To mitigate future financial difficulties, banks recommend home loan protection plans.
These policies can be structured so that the loan repayment term aligns with the insured amount. As the loan amount decreases, the insurance coverage can also decrease—a feature known as reducing cover.
Some insurance companies offer level cover, where the policy value remains the same despite decreasing loan amounts. It’s essential to note that, although these policies pertain to home loans, standard term insurance regulations apply, meaning the premium is determined by factors such as the borrower’s age, health, and the insured amount.
Furthermore, some insurance providers offer compensation if the borrower becomes disabled due to an accident, while others may only pay out upon death.
Policies that can help repay the loan in cases of serious illness or job loss are also available. Such additional coverage can be important to a core loan cover policy.
Choosing the Right Insurance Policy
While securing an insurance policy for your home loan is advisable, selecting one from the bank’s recommended provider is not mandatory. The choice ultimately lies with the borrower.
If you decide to switch banks, be aware that your previous bank’s loan cover term policies will be canceled. In this scenario, you may be required to obtain a new policy from the new bank, which can be a disadvantage.
However, it is possible to request conversion of your existing insurance policy into an individual term policy, allowing it to be linked to the new loan.
It is essential to have a term policy that covers your loan responsibilities and an additional term policy to safeguard your family’s financial future. This way, your dependents won’t face undue financial strain.
For example, consider Venkat, a 35-year-old who took a bank loan of ₹1 crore (approximately $130,000) to buy a flat. If he opts for a group term policy through the bank, his premium could be around ₹ $3,00,000 (level cover).
Assuming an interest rate of 8.85%, his monthly installment would be ₹ $2,670, leading to a total repayment of ₹ $6,40,873 over 20 years.
In contrast, if Venkat chooses to take a personal term policy for ₹1 crore, his annual premium might be approximately ₹19,000, totaling ₹3,80,000 over 20 years.
This illustrates a significant difference in costs. (Note: These premium figures are estimates. Consult your bank and insurance company for exact amounts, as premiums will vary based on age, health, and lifestyle choices.)
Ultimately, it’s important to carefully consider which insurance policy to take when securing a home loan. Thorough research and informed decision-making can help ensure your family’s long-term financial stability.