You may not need home loan insurance
Well, of course, we’re not suggesting you go without any sort of insurance when you have hefty home loan hanging on your head. It’s just that a simple term plan is broader in scope.
As much as they try, there isn’t really a need for more than one life insurance product – plain-vanilla term insurance. Unit-linked insurance is inflexible, endowment is very costly, and premium-back term plans are just useless. Now, home loan insurance isn’t even near as bad as these above-mentioned three, but, as we shall soon find out, even it is unnecessary.
What? With home loan protection insurance, sold by many insurers and usually promoted by the bank lending you the money, the sum assured at any given time is an amount equal to the balance of the loan; it is paid out in case of the policyholder’s untimely death during the loan repayment term.
Why not? Firstly, it is usually offered as a single premium plan. Then, the sum assured decreases as you repay the loan. Lastly, the term of the policy is tied to the length of time you take to repay the loan. Let’s find out why all three make this a poorer option than term insurance.
Single premium You pay a lump-sum for the full tenure of your loan under a single premium product. If your loan tenure is 15 years, you’ll be paying the premium for all 15 years; however, you may finish paying the loan within eight years. Moreover, if the sum assured is under 10 times the single premium, as is usually the case with a single premium policy, it would not be eligible for tax benefits either.
Decreasing sum assured This may seem like a good enough choice if you’re already adequately insured, but if you’re not, it means that in just a few years of repayment, you will be severely under-insured. For example, if you take a loan of Rs50 lakh at an interest rate of 10.5%, you will be repaying next to a crore over 15 years. However, in just five years, you’d have only around Rs66 lakh left to repay of the loan, which is also what your sum assured would be. Also keep in mind that such plans are not that much cheaper (usually no more than 10-20%) than buying a regular term plan wherein the sum assured remains constant.
More expensive later If you happen to prepay the loan in, let’s say, eight years, you’ll be left without any term insurance. So you’ll have to shop for a basic term plan when you’re eight years older, meaning that you’ll be paying much more than you have to today. Basic term plans are already available for up to 30 years, which is most probably much longer than the number of years you’ll take to finish repaying your loan.
If you’re convinced of the same, have a look at our post on the cheapest online term plans.