Life Insurance as a Tool for Redemption of Mortgage

2024-08-02

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Purchasing a home is likely to be a top priority in the lives of most working individuals. While the best case scenario would allow you to purchase property utilizing only your own funds, this may not always be the case. Most people often end up having to solicit mortgage loans which allow them to borrow up to 80% of the amount required to purchase a property- with the property itself being used as collateral- and pay the sum back over a fixed period of time with interest. These types of loans are often only issued to those with a steady source of income and good prior credit history. Additionally the regular payments made, referred to as the Equated Monthly Installments(EMI) should preferably not exceed 50% of the borrower’s income as this would greatly increase the risk on the lender’s part.

When considering the fact that these loan amounts are often considerably larger than some other types of loans such as personal, educational or automobile loans, they can become a huge liability in situations where the primary breadwinner in a household either passes away or is incapacitated due to illness or injury. In such cases, the household's income stream is likely to dry up either partially or completely and their next of kin may find it difficult to make regular payments without defaulting. An often used method of dealing with this situation is through the purchase of a life insurance policy that accounts for the repayment of these loans in the event of the policyholder’s death or incapacitation. Possessing a life insurance policy with such conditions is a recommended step in devising a financial strategy for mortgage loan repayment. There are a number of policy types that can be purchased depending upon the loan amount, repayment period, type of coverage desired and the borrower’s income. They have various pros and cons which are vital to understand before deciding upon the best life insurance policy for the redemption of your mortgage :

Conventional Term Plans: Term plans which include loan repayment as part of the death benefit sum are commonly employed in order to safeguard the policyholder's family from burdening debts as they offer additional coverage apart from the loan amount itself. A high sum assured is provided with relatively lower premiums as compared to a traditional life insurance policy. Term periods are fixed in these types of policies and the method is best suited for when the loan tenure ends before that of the term life insurance policy itself in order to avoid the risk of having a lapsed policy at the time of the borrower’s demise. Top ups in the form of a critical illness plan provides added coverage in case the policyholder is medically incapacitated and unable to make regular payments. Some plans may even offer investment options or return the premiums paid on maturity, subject to terms and conditions.
Decreasing Term Plans : Decreasing term plans are in a way, structured to cater to those looking to safeguard their family members from taking on their debts in the event of their passing. In this type of plan, the sum assured is settled upon at the start of the tenure based on the loan amount to be repaid. This sum reduces over time as the loan is paid back and eventually reaches zero on maturity. The premiums in this type of plan are often lower than those of conventional term plans due to the periodic reduction of coverage as debts are repaid. In some ways, these plans may be the best life insurance policy for those exclusively seeking to deal with existing debt.
Mortgage Protection/Redemption Term Plans : Mortgage protection or redemption plans are specifically catered to securing home loans. This type of life insurance policy is fairly similar to decreasing or conventional term plans depending upon the service provider. One main point of difference is that a portion of the premiums are generally paid up front as a lump sum and may be higher than those of term plans. This amount paid is often not refunded at the time of maturity as it is a pure protection policy in most cases with no maturity benefits.
Conventional Life Insurance Policies : Long term loans may be secured with the help of a traditional life insurance policy which accounts for these types of liabilities in the event of the policyholder’s demise. While there may be maturity benefits and investment options, premiums are often higher than those of term plans offering similar coverage.

Conclusion

Most of these policies are tax exempt under Section 80C, however those with lapsed term policies cannot avail this benefit. Understanding the amount of coverage you require as well as any additional top ups is vital in picking an appropriate policy type to secure your mortgage. There is quite a bit of information that needs to be digested before you are able to decide on the best life insurance policy to secure your family against defaulting on your mortgage under any circumstance.

Opting for the iSelect Smart360 Term Plan from Canara HSBC Life Insurance provides flexibility in coverage amounts as well as whole life cover, premium return and short tenures of up to 5 years to ensure that your family isn’t burdened with mortgage repayment in any situation.

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