Insuring our home loan is not something we do instinctively, but it’s a smart way to protect our investment
It does not seem like an important or urgent decision, so you either put it off or don’t do it at all. But this is one expense that might well be an investment — home loan insurance.
Since the tenure of home loans is longest compared to other kinds of loans, we could all be vulnerable to mishap in some form, such as illness or death of one of the chief earning members of the household while one is in the middle of repaying the loan. That’s why it makes prudent sense to cover the risk by insuring it.
There are two ways of insuring the loan, and should be ideally done at the time of availing the loan itself. The first is to buy a term assurance policy for the specific tenure of the loan, and pay the premiums through the tenure. The second is to opt for a single premium plan.
For example, if you are 30 years old, and have taken a home loan of Rs. 30 lakh for a period of 20 years, then you should take a pure risk cover for a sum assured of Rs. 30 lakh. The annual premium will be in the range of Rs.6,000 per annum, payable through the tenure of the policy (Rs. 6,000 x 20 years). In case of untimely death of the insured person, the insurance company will reimburse the sum assured to the legal successor or nominee, and it can be used to clear the loan outstanding as on that year.
The second option, which comes highly recommended, is to avail a Home Loan Protection Plan. Offered by most insurance companies, it ensures that the outstanding loan, up to the amount insured, is repaid in the unfortunate event of the death of the borrower. Unlike the previous plan where the premiums are paid throughout the policy term, here it is a ‘single premium decreasing term assurance plan’ where, as the loan outstanding reduces, the sum assured also reduces in the same proportion. This means the insured person only pays premiums for the amount outstanding and does not keep paying premiums for the entire amount.
The one-time premium amount will be based on the age of the borrower, loan amount and loan tenure. For the above quoted example, the premium could be around Rs. 80,000.
Home Loan Protection Plans are often sold along with the housing loan since most HFIs and banks either have in-house insurance agencies or tie-ups with some. Some banks also add the premium charge to the loan itself.
A point to be noted is that under the single premium method, if the borrower dies during the course of repayment, after adjusting the outstanding loan amount, any balance is paid to the nominee or legal successor. Thus, if the loan tenure is 20 years and the outstanding loan amount is Rs. 20 lakh, against an originally borrowed amount of Rs. 30 lakh, then at the end of five years if the borrower dies, the bank will adjust the loan outstanding and the balance of Rs. 10 lakh will be paid to the legal successor.
It is easy to conclude that if death does not occur during the loan repayment tenure, the premiums paid are a waste of money. But the point of insurance is that it is a hedge against risk. Over a period of 20 years, anything can happen and the premium should thus be seen more as an investment. You can avail tax benefits too under Sec. 80C on the premiums paid.
The writer is a Bangalore-based financial consultant. Mail him at firstname.lastname@example.org