Why Get Term Insurance Against Your Home Loan?
Buying your dream home is one of the biggest financial milestones achieved with several years of savings, planning, and income stability. It is quite likely that you would have availed of a home loan to transform this ambition into a reality.
Generally, financial institutions provide up to 80% of the property value as a loan, and the balance is your down payment towards the home. According to financial experts, total Equated Monthly Installments (EMIs) on various loans should be about 50% of your income. This ensures you do not have financial difficulties to meet various other commitments.
A home loan is a long-term obligation of over 20 years or more. The loan is based on the assumption that you will be working during its tenure, ensuring you have a steady income to repay the borrowed amount. Unfortunately, there is no certainty in life and an untoward incident may result in financial havoc for your family. Therefore, it is recommended to buy term insurance to cover the home loan. Do you know what is term insurance? Well, it is a simple form of life insurance policy, which pays the death benefit to your nominees in case of your untimely absence during the plan’s duration.
Here are four reasons to buy a term plan when you take a home loan:
- Financial security
In your sudden absence, the responsibility of repaying the home loan and other liabilities falls on your family. If they are unable to repay the money, they may have to vacate the home. One of the important term insurance benefits is that the insurer pays the sum assured (SA) to your nominees if something adverse happens with you. This will help your nominees to repay the home loan without any liquidity crisis, ensuring their monetary stability.
- Low risk of default
While granting a home loan, any financial institution believes that you will earn a regular income with a secured job. However, if you are diagnosed with a critical ailment or are disabled in an accident, it may impact your capability to continue working. You can add these riders to enhance the term insurance benefits and reduce the risk of default if you are unable to work and earn like earlier.
- Affordable coverage
You may already have a term plan to protect your loved ones against financial instability when you are not there to take care of them. However, it is recommended that you enhance the cover to an amount equal to your home loan. As a term plan is a pure life cover with no survival or maturity benefit, it comes at a cost-effective premium. This allows you to get a higher SA for a nominal increase in the premium, thereby ensuring peace of mind and financial protection for your dear ones against any eventuality.
- Support during home loan transfer
If you are getting a lower rate of interest or longer repayment tenure, you may transfer your home loan from the existing lender to another institution. The coverage under a term insurance plan continues even if you switch your home loan, as it does not depend on the lender. This ensures that you do not have to reapply for a new term insurance plan and undergo the entire procedure again.
Some financial institutions offer term insurance with fixed benefits. When you buy this type of term insurance, the cover is linked to the repayment schedule. This means that the insurance coverage and outstanding amount decrease as you repay the loan. The purpose of this term insurance policy is to secure the home loan in case of an unforeseen circumstance.
A term insurance plan in India can continue to offer the coverage even after you repay the entire loan. This is an additional security for your family members against financial difficulties in your absence. They can use the death benefit to repay other liabilities or to meet their daily expenses.
You can buy a home loan protection plan (HLPP) when you avail of housing finance. However, the premium for this is higher than a usual term plan, and you cannot change the coverage value if you transfer the loan and extend its tenure.