Home loans are the most common among the larger liabilities for the present generation in their life. Most of the youngsters are quite prudent today and obtain home loans between the age of 25 and 30, so that they can live separately as a small nuclear family after marriage, instead of staying with their parents. However, there are two factors that generally cause worry for them.
One is the ballooning inflation costs which reflect in rising interest rates. Most of the banks and financial institutions that provide home loans have stopped the offer of fixed interest loans and prefer variable interest loans to balance the vagaries in interest rates. Even financial consultants advise their clients to opt for variable interest rates, since there is a possibility of lower rates in future, considering the fact that the interest rates are near all-time high at present. However, any rise in the interest rates at present will tend to increase the EMI, particularly when the outstanding balance on the loan is quite large.
The second factor that should cause worry to those planning for home loans to finance their apartment or house purchase is that life is never permanent. The ultimate eventuality can come at any time, especially when the risks in driving on present day roads is quite high and the increase in natural calamities and terrorist attacks. What will happen if such an eventuality comes to you and those who are dependent on you are unable to meet the home loan liability?
Hence, it is necessary to consider the choices available to you in mitigating the above risks. Majority of financial consultants will advise you to select a loan protection insurance plan that covers the loan amount. Even the lending institutions like banks and housing finance companies will give the same advice and encourage you to choose loan protection insurance along with the home loan, since their loan amount will be guaranteed by the loan insurance. For those who are not aware of loan insurance plan, it is an insurance that clears the outstanding home loan amount, if death occurs to the home loan applicant during the tenure of the loan, instead of passing on the burden to the dependants of the deceased. While this appears to be a sound piece of advice on the surface, there are several factors that make this a poor choice. Let us consider them in detail.
Understand What Home Loan Protection Insurance Plan is
Home loan protection insurance plan is different from private home loan insurance, which protects you only when you are unable to pay your home loan repayments and the lender forecloses your property. On the other hand, home loan protection insurance plan covers your home loan balance at any point of time. Since this plan comes into effect only when something fatal happens to you, the policy amount also gets reduced as the home loan balance diminished over a period of time.
Under this plan, you will be usually be required to pay a one-time premium of a fixed amount, which will be calculated by the home loan protection insurance plan provider, based on your home loan amount, your age, your health condition and the period of repayment. For example, if your home loan is Rs. 30 lakhs, the one-time premium that you pay when you first avail the home loan can be around Rs. 50,000. You can pay this premium by cash in the beginning itself. However, most home loan lenders allow you to club this amount with the home loan and pay this also in instalments. However, this will increase your EMI even further.
Advantages of Home Loan Protection Insurance Plan
The main advantage of home loan protection insurance plan is that you obtain your home loan and protection insurance without too many questions asked and with minimal or no underwriting or documentation fees for the protection insurance plan. This is because the lender is assured of getting his home loan repaid, irrespective of anything happening to you. Another possible advantage can be that some home loan protection insurance plans also offer the same protection if you are permanently disabled due to an accident or a major disease and in certain cases where you are terminated by your employer. In the latter case, the insurance provider will pay the EMIs until you get an alternate job but this will usually be limited to 3 or 6 months and only for one termination. You will not be eligible for this facility if you resign on your own.
The third advantage is that most home loan protection insurance plans are offered without medical checkups and screening. Hence, if you are suffering from some physical condition, this can be appealing. However, even for term insurance plans, most insurance companies offer ‘no medical exam insurance policy’ for people below the age of 50 or 55. Hence, this is not a real benefit.
Disadvantages of Home Loan Protection Insurance Plan
The major disadvantage in home loan protection insurance plan is that the costs involved are much higher than an equivalent term insurance plan, both in terms of premium amounts and in terms of tax deduction values. Since home loan protection insurance plan is a decreasing one and can be used only to clear the home loan in case of death, there is no actual benefit to you in any way. If you are still alive after repaying the home loan, you do not get anything for the Rs. 50,000 that you paid.
Term Life Insurance Policy Benefits
Let us consider the same amount of Rs. 50,000. For a term life insurance policy of Rs. 50,000, your annual premium will be only around Rs. 200 per month for a period of 20 years, if you are aged 30 and about Rs. 250 per month for 20 years, even if you are aged 50 at the time of availing the home loan. If you die before the end of the 20 years, you will get around Rs. 1,20,000, including the policy amount of Rs. 50,000 and the bonus or dividend amounts declared annually by the insurance company. This is quite a substantial amount compared to the NIL amount that you get under home loan protection insurance plan.
Further, you can always purchase a term insurance policy for Rs. 20 lakhs for 20 years, which will entail only a premium of Rs. 2,500 per month, if you are aged 30. Even if anything happens to you before the expiry of the housing loan, your dependants will still be getting around Rs. 30 lakhs to Rs. 40 lakhs, which will not only meet the housing loan but will also leave substantial amount to them as balance.
Considering all these factors, term insurance is always the better choice compared to home loan protection insurance plan. If you have further questions or doubts on this issue, feel free to contact us and we will be obliged to provide the necessary clarifications and answers.