Why is a life insurance policy needed to cover a home loan?

Since the amount of home loan taken to buy a house is a significant part of the monthly income of the household and if God forbid anything happens to the bread earner of the family, it becomes almost impossible for the family to leave the house and run the household. loan in this case

As a basic principle of financial planning one should buy life insurance to cover all his financial liabilities. When you take a home loan, you create a new financial liability and taking a life insurance policy to cover the home loan liability will ensure that the legal heirs inherit the house and not the home loan liability . This will help the family avoid the double pain of losing the regular income of the bread earner and leaving the house if sufficient amount is not available to pay off the outstanding home loan.

Let me make it clear that the life insurance policy recommended by me is over and above the regular life insurance cover that you already have, so that your family members can be protected in case anything happens to you.

How to go about it

The basic advice that a financial planner gives is to buy life insurance only through term plans and not go for any other insurance product. This advice equally applies here. If you are tech savvy and can transact online, then I would recommend you to buy online term plan which is cheaper than regular term plan without any product difference. The tenure of the life insurance policy to be purchased for this purpose should be equal to the tenure of the home loan.

Lenders generally insist for single premium term plan policies that are designed for home loans where the amount of insurance premium is included in the home loan and recovered over the tenure of the home loan through increased EMIs . However, I would advise you not to take a single premium policy but opt ​​for an annual premium paying policy.

This is because in most cases, home loan borrowers do not run their home loan for the entire tenure but generally prepay the home loan when they deposit the required amount. In such a situation, part of the premium already paid under a single premium policy gets wasted as the insurance policy continues when the relevant liability is outstanding.

Also if you are able to get the insurance company a ready term plan for your home loan, you should ask the insurance company to reduce the sum insured corresponding to the outstanding home loan amount at the end of each year. This will make your life insurance cheaper and cheaper.

Do you need to buy a home loan protection plan from the same home loan lender?

First of all let me make it clear that neither the banking rules nor any other law mandates that the home loan borrower has to buy a life insurance policy to cover the home loan. However, to avoid the hassle of taking possession of the property and auction it to recover the outstanding home loan, most of the lenders insist on buying life insurance along with the home loan.

Also most of the banks offering home loans either have their life insurance partners or have arrangements with some life insurance companies to sell their products to increase their income, these lenders push for life insurance policies through them Which is not mandatory for you. If the life insurance policy offered by your lender is not the cheapest, you may refuse to oblige. If the lender does not heed, you can ask them to submit in writing the need to purchase a life insurance policy as a mandatory and precondition for granting the home loan. Since the lender cannot give it to you in writing, they will agree even if you buy a life insurance policy from another insurance company and hand it over to them.

Let me make it clear that though it is not mandatory to buy a life insurance policy with a home loan, it is in the interest of you and your family members to ensure that you have a term plan to cover the liability on your home loan. buy. Peace of mind to you and your family members.

Balwant Jain is a Tax and Investment Specialist and can be contacted at jainbalwant@gmail.com and @jainbalwant on Twitter.