Beyond The Loan: Choosing The Right Insurance For Your Home And Family
Home loan insurance covers the loan balance while term insurance pays a set amount to your nominee. The cost, flexibility, and benefits of both types of policies vary.
Insurance is often overlooked during home buying, which is a significant milestone. Many people opt for home loans to fulfil this aspiration, and hope to pass it on to their loved ones in the future. But, if something happens to you, the debt burden would fall on your family, possibly derailing their own aspirations and goals. That’s where loan insurance comes in.
Home loan insurance or term insurance are two types of insurance chosen by borrowers for this purpose, but both work differently. Home loan insurance covers the loan balance while term insurance pays a set amount to your nominee. The cost, flexibility, and benefits of both types of policies vary, and understanding them can help you choose the one that’s right for you.
What Is Home Loan Insurance?
Home loan insurance, or mortgage insurance, primarily protects the lender. If the borrower passes away while servicing the loan, the insurer pays the bank to clear the debt, allowing the deceased’s family to retain the home. The premium for such a policy is paid upfront or added to EMIs. Since the policy is tied to the specific loan, its coverage reduces with a decrease in the outstanding loan. However, prepaying or switching lenders typically nulls the coverage and no further benefit is provided to the family. Some plans also offer riders for job loss or disability at extra cost. However, this is essentially a limited, single-use product where the bank/lender often selects the insurer, potentially reducing transparency for the borrower.
What Is Term Insurance?
Term insurance is a pure life cover that pays a fixed amount (sum assured) to your nominee if you die during the policy term. This money can be used for anything, like paying off your home loan, children’s education, or managing daily expenses.
In case of term insurance, the payout is not linked to the loan, and remains the same. So, if you pay off your loan early, the term plan still covers you. You also have the freedom to choose any insurer or policy.
A term plan costs less than home loan insurance–a 30-year old can buy a Rs 1 crore term cover for just Rs 10,000–Rs 15,000 per year. Moreover, buying a policy online may be cheaper and doing so early will allow you to cover many future needs. Overall, this is a flexible, long-term option.
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Which Is Cheaper?
Between these two, term insurance may be a more economical option than home loan insurance. For instance, a Rs 50 lakh reducing cover for 20 years could cost Rs 1–2 lakh upfront, while a similar term plan might be Rs 7,000–Rs 9,000 annually.
The mode of payment also differs–home loan insurance often requires a lump sum payment that is added to your loan EMI, accruing interest. Term insurance, however, allows yearly or monthly premium payments, and can cover more than one loan at a time, offering broader financial security.
What Happens If You Switch Or Prepay?
Closing your home loan early typically renders your home loan insurance policy void, with refunds often unavailable after 3–5 years. Similarly, switching banks also necessitates a new policy, potentially involving fresh medical examinations and additional expenses. Some home loan policies are tied to the lending bank, making job or address change updates cumbersome.
Term insurance operates differently. The policy remains active regardless of loan status or changing lenders, ensuring your nominee receives the full sum assured. Between the two, term plans offer greater ease of management, providing you with direct control over the policy and the claims process.
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Which Should You Choose?
Term insurance is often a better choice that usually costs less, is more flexible, and covers more than just your home loan. Home loan insurance, on the other hand, makes sense if your loan is short, you have no dependents, or if you can't get term insurance for health reasons.
Most importantly, don't buy insurance simply on the bank’s insistence. Compare costs, check what is covered, and understand what you’re getting. A term plan usually gives wider protection as it helps your family. Remember, the right insurance can protect your home and your future so choose carefully.
(The author is the DGM-Communication at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)
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