Q. My wife and I work in government sector, and our salary is ₹ 35,000 and ₹ 54,000 (net) respectively. We are both in our forties and have jointly taken a home construction loan of Rs 60 lakh for 25 years. The question is regarding the choice of my wife’s insurance cover or should I opt to protect/waive our home loan in case of any uncertain event.
Ravindra Kumar
A. Mortgage insurance is usually bundled with home loans. The Sum Assured on these loans matches the loan amount and the term of the policy matches the term of the loan. The policy is handed over to your housing loan company, so they are paid the claim, from which they can adjust it against the outstanding portion of the loan, interest and charges and pay the balance amount to their nominee. The function of the cover is to make good the outstanding loan and interest in case the borrower passes away without repaying the loan.
This leaves the property debt free for the surviving owners/family members who are grappling with the loss of a loved one and the breadwinner on it.
For some reason you have not opted for it or your housing loan company has not made it mandatory. A good first step is to ask them about their options/offers, if any, so that the insurance works seamlessly with your home loan.
That being said, term insurance policies backing home loans have some difficulties as they are defined for the needs of your lender.
For example, the cover will expire along with your loan, that is, it will end at the same time your loan is scheduled to be repaid, while you may want to continue with the policy as a security for your family . beyond that date. Kindly look for term insurance independently, with matching sum assured and policy terms.
If you find something that you like, make sure to change the Sum Assured and Tenure to your liking, making sure that the first is greater than your home loan amount and the latter is greater than the loan tenure. You are unlikely to get better rates as the housing loan company would have negotiated the wholesale rate, but there is no harm in doing this research. You can get add-on covers of your choice. You can ask your housing loan company to get this add-on cover for you, but they may or may not be interested!
Q. I have an endowment insurance policy which requires premium to be paid for 10 years and I also have a pure term insurance policy for 25 years with a sum insured of ₹ 1 crore. Is it advisable to take both the insurance covers? If not, and if I surrender the endowment policy, what are the pros and cons?
Joel Kirubakaran:
A. Since you have purchased both the policies and are paying the premium, only affordability or creating more efficient coverage can be a reason to surrender the endowment policy.
If you wish to do so, you can check whether your policy has become eligible for paid-up or surrender. Your insurance company and your agent’s website can also help you with information and formalities. If you make the policy paid-up, you will not have to pay premiums and the policy coverage will continue with a smaller sum assured.
If you wish to recover some of the money already invested, you can surrender the policy based on the terms and conditions. You will get back a part of the premium paid by you and the coverage will terminate. After doing so, if you think it is sufficient, you can continue with your term insurance, or apply the premium that you avoid paying on the endowment or the surrender value you receive, a For new term policy. Due to the difference in premium rate between the two types of policies, you will have more coverage than in the earlier combination.
Question. I am 28 years old and I have a 20 year tenure endowment plan which started in 2018. The premium I pay now is ₹3,400 per month. After reading many finance-related articles including HinduMoneywise section, now I feel that an endowment plan is not the best investment option. What better plan for me if I surrender my endowment? Also, will there be any harm in surrendering it before maturity?
Ajin Krishnan
A. Surrender comes at a cost. You will get a refund of only a portion of the premium paid so far and the coverage will cease. You can check whether the policy is eligible to become paid-up or not. In this case you can stop paying the premium and the coverage will continue on a reduced basis. You can then rebuild your life insurance portfolio to the levels you want at better prices.
Almost all of the information will be available to you on the face of the policy or on your insurer’s website to compare the cost of surrendering or paying it up. Your agent or branch of your insurance company will assist you with information and procedures. They will also tell you the drawbacks of this type of closure and strongly advise you against it. Take their side of advice, but also do some research yourself and come to the decision that’s right for you.
(The author is a Business Journalist, specializing in Insurance and Corporate History)