Term Insurance Plan For Home Loan

Term Insurance for Home Loan: All You Need to Know

Home loans can burden your family if something happens to you. Term life insurance offers a cheaper, more flexible way.

Written by : Anamika Arora

Reviewed by : Akanksha Gangvany

Akanksha Gangvany

2023-05-16

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9 minutes read

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Buying a term insurance plan for a home loan may not sound feasible. You may wonder how a term plan and a home loan are related. However, a term plan is not limited to providing life cover.

A term plan is the purest form of life insurance. It provides financial protection at a low premium rate. If you pass away within the policy term, the plan will give the sum assured to your nominees, taking the financial burden off their shoulders.

Term plans also come with a Return of Premium option. If you outlive the policy term, all the premiums you pay will be returned.

But how can term insurance benefit benefit if you have a home loan? We will discuss this in detail in the blog. However, before that, let us understand what home loan insurance is and how it works.

Table of Content

What is Home Loan Insurance?

Home loan insurance, often called a home loan protection plan, acts as a safety net for your family in the unfortunate event of your passing during the loan term. It's an insurance policy that safeguards your loved ones from the burden of your outstanding mortgage. With home loan insurance, if you die while you still owe money on your home, the insurance company pays off the remaining loan balance to the lender. This financial protection ensures your family doesn't inherit the stress of managing your home loan and allows them to keep the house.

Considering a home loan is a significant financial commitment, home loan insurance offers peace of mind. It guarantees that even if you're no longer around, your family won't be forced to sell the home or face foreclosure due to unpaid loan instalments. This stability is particularly crucial if you're the primary breadwinner in your household.

How Does Home Loan Insurance Work?

Here is a breakdown of how loan insurance works.

  • Policy Purchase: You buy an insurance policy alongside your mortgage. This policy will have a specific term, usually matching the length of your home loan.
  • Premium Payment: To keep the policy active, you'll pay regular premiums throughout the loan term. Depending on the policy, these premiums can be paid monthly or annually.
  • Unexpected Death: If you pass away while the policy is active and you still have an outstanding loan balance, your beneficiary (usually a family member) files a claim with the insurance company.
  • Payoff to Lender: Upon receiving a valid claim, the insurance company pays the remaining loan amount directly to your lender. This extinguishes your mortgage debt.
  • Home Ownership Secured: With the loan balance settled, your home's ownership gets transferred to your beneficiary free and clear of the mortgage.

Types of Insurance Cover for a Home Loan

There are three main types of insurance coverage you can consider for your home loan:

  1. Level Cover Plan: This plan offers the simplest and most consistent coverage. The payout amount (the maximum the insurer will pay towards your loan) remains the same throughout the entire policy term. This means you're guaranteed full coverage for your loan balance regardless of how much you've paid down on the mortgage over time. The premium for this plan will likely be the highest of the three because it offers constant protection.

  2. Hybrid Cover Plan: This plan combines high initial coverage and gradual decrease. It offers full coverage for the first few years of the policy, typically one year. After that initial period, the coverage amount starts to reduce as your loan balance shrinks. This plan acknowledges that your loan balance gets smaller over time, so the insurance must pay less. Premiums for this plan are likely to be lower than the level cover plan because the coverage amount reduces over time.

  3. Reducing Cover Plan: This plan offers coverage that directly reflects your outstanding loan balance. As you make your mortgage payments and your loan balance decreases, the coverage amount provided by the insurance also reduces. This plan is the most cost-effective option as the premium is directly tied to the risk (the remaining loan amount). However, it's important to consider that if you die towards the end of the loan term, there might not be enough coverage to pay off the remaining balance completely.

How to Protect Loved Ones Against Home Loans with Term Insurance?

A home loan is a long-term commitment, and you should understand what you are committing to while taking the loan. If you are the only earning member in the family and paying the EMIs and something happens to you, the burden of paying a loan falls on your family members. If they fail to repay the loan, your home (or collaterals) may get seized.

With a term insurance plan, the remaining debt can be paid through the insurance if something happens to you during the policy term.

Usually, the tenure of a home loan tenure is 15 to 20 years. Life does not come with any guarantee, and there is no guarantee it will go according to your plans. You certainly don't want your family to go through this phase. A term insurance plan is a solution to the problem. To ensure maximum benefit, it is vital to select the coverage that is sufficient yet economical for your requirements. To make the assessment and calculation easier, you can use a home loan insurance calculator. It will help you determine the premium amount, duration, etc., and will help you make an informed decision.

What are the Benefits of Buying Term Insurance for your Home Loan?
 

  1. Protects your Family: In case something happens to you, your family will already be going through a tough time mentally. You don't want them to worry about the home loan or the next EMI or about the collateral you have kept against the home loan. A term insurance plan will be a financial assurance to your loved ones during such a time.

  2. Protects your Asset: When you have a term plan for your home loan, your other assets are protected. If you don't have a term cover, your family may have to sell the assets that you would have invested for the long term.

  3. Tax Benefits: The premium you pay towards your term life insurance plan is eligible for tax deduction under Section 80C of the Income Tax Act.

  4. Peace of Mind: With a term plan for your home loan, you can have peace of mind knowing if something happens to you, your family will have a financial backup.

Did you know?

Under Section 80C of the Income Tax Act (India), you can receive a tax benefit for the premiums you pay towards your term life insurance plan.

Source: ETmoney

Claim Settlement Ratio

Home Loan Protection Cover - Alternative to Term Plan for Home Loan

There is another way to protect your family if you have a home loan. You can buy a home loan protection plan. It ensures if you die, whatever the pending loan amount is taken care of by the protection cover. It will ensure your dependents do not have to be financially burdened with a home loan in your absence.

Difference between a Home Loan Protection Plan and a Term Insurance Plan

When applying for a home loan, banks may ask you to secure your loan through insurance or protection coverage. However, you must weigh the pros and cons of both instruments before opting for one.

ParameterHome Loan Protection PlanTerm Life Insurance
FeatureThe insurer pays off the balance on the loan should you face an unforeseen event.The plan provides a death benefit
PremiumOne-time paymentSpread over years
FlexibilityAny change in the tenure of the home loan does not affect the coverage period.Coverage can be modified by adding riders to the term plan.

Final Words

A home loan is one of the huge financial liabilities you may have in your life. However, given the importance of the house for your family, you do not want the asset to slip away due to a contingency.

Thus, you cover the risks using life insurance plans so that even if you pass away, your family can repay the loan and own the house.

Canara HSBC Life Insurance iSelect Smart360 Term Plan offers multiple coverage options that let you increase your sum assured according to your needs. If you choose the Block your Premium option, the premium rate will be blocked for 5 years, and you can increase the base sum assured by up to 100%.

Choose a protection cover that best suits your needs and aligns with your financial horizon.

Glossary

  • Term Insurance: A life insurance policy that provides financial protection for a specified period. If the policyholder dies within the term, the nominee receives a death benefit.
  • Home Loan Insurance (HLI): Also known as mortgage protection insurance, HLI is an insurance policy that pays off the remaining balance of your home loan if you die during the loan term.
  • Level Cover Plan: An HLI plan that offers a fixed payout amount throughout the policy term.
  • Hybrid Cover Plan: An HLI plan provides a high initial coverage amount that gradually decreases over time.
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FAQs Related to Term Insurance for Home Loan

Lenders require (or strongly recommend) home loan insurance because it mitigates their risk. If a borrower dies during the loan term and the loan isn't insured, the lender faces challenges collecting the remaining balance.  Foreclosure is an option, but it's a lengthy process with additional costs. Home loan insurance ensures a quicker payout to the lender in case of the borrower's death, minimising their risk and financial losses.

While not mandatory, home loan insurance offers significant benefits for borrowers. It protects your family. If you pass away, the insurance pays off the remaining loan balance, ensuring your family inherits the house free and clear of mortgage debt. This eliminates a huge financial burden during a difficult time.

Whether or not it's wise to take insurance for a home loan depends on your circumstances. Here's a breakdown to help you decide:
 

  • Pros: Protects your family from financial hardship, safeguards your asset (the house), offers peace of mind, and may provide tax benefits (depending on your location).
  • Cons: Adding extra cost to your monthly payments may not be as flexible as term life insurance.

Term life insurance, as discussed in the blog, can be a good alternative to home loan insurance.

The death benefit of a home loan insurance plan is the outstanding loan balance at the time of the borrower's death. This amount is paid directly to the lender, effectively paying off the mortgage.

There isn't a single "golden rule" for home loans, but here are some key principles to consider:

  • Only borrow what you can afford. Don't overextend yourself financially.
  •  Shop around for the best interest rates and terms.
  • Factor in additional costs like closing fees and property taxes.
  • Consider getting pre-qualified for a mortgage before house hunting.
  • Protect your investment with proper homeowners insurance.
  • For many, having some form of life insurance, whether term life or home loan insurance, protects your family in case of the unexpected.