How to Protect Home Loan With Term Insurance

We all grow up with big dreams and aspirations! Some dream of becoming actors, others want to become world-class chefs, and so on. But there’s one dream that many people share - buying a house, a place you can truly call home! But the cost of real estate keeps going up. So, you take a home loan to make this dream come true. As we all know, you must pay back the loan with an added rate of interest, which makes taking a home loan a big deal. It is a financial commitment that can last for many years, even decades.

And the harsh truth about life is that it does not come with any guarantees. In case something unfortunate were to happen to you before you finish paying off the loan, the bank or financial institute would demand the remaining settlement from your family. That’s where things can get a bit difficult for them, as they will have to shoulder the burden of repaying the loan.

Enter term insurance! It is a safety net that provides financial security to your family if something were to happen to you. It will ensure that your loved ones won’t have to bear the debt burden in the event of your untimely demise. When you take a home loan from a bank, they usually require you to have term insurance. They may even offer you one themselves. But, you should evaluate other options too to find the best policy that suits your family’s needs.

In this article, we will explore how term insurance safeguards your home loan and ensures a secure future for your family.

What Exactly Is Term Insurance?

Term insurance is a simple and effective solution to safeguard your family's financial future. By investing in it, you provide an ally for your loved ones that ensures they are financially protected if something happens to you during the policy period.

In the event of your passing away during the policy period, the insurance company will provide your family with a sum of money, known as the 'sum assured'. This amount will replace your income and help your family maintain their financial stability without having to compromise on their dreams and lifestyle. They receive this amount based on the claim payout option you select while purchasing the policy.

Term insurance is a pure risk cover. If you survive until the end of the policy term, you will not be entitled to receive any benefits.

Term Insurance For Home Loan Protection

If you take a home loan and expire before repaying it, your family will have to shoulder the repayment burden. It would become even more challenging for them if you are the sole earner in the family and they rely on your income for their livelihood. Therefore, securing your home loan with term insurance creates a protective shield that covers your loved ones from potential financial hardships.

In case something unfortunate happens to you when the term insurance coverage is active, the insurance company steps in and provides the cover amount as a death benefit to your family. This money can then be utilised to pay off the remaining balance of your home loan. Thus, it brings peace of mind knowing that your family will be able to keep their cherished home - without having to worry about the financial strain.

Now, let’s explore the various options under term insurance you can choose from if you have taken a home loan -

1. Decreasing Term Plan

As the name suggests, a decreasing term plan is a term insurance plan in which the sum assured decreases periodically by a predetermined percentage. The purpose of this plan is to protect your family against the outstanding loan amount in case you pass away before the loan is settled.

If your main goal is to ensure that your family doesn’t have to bear the brunt of repaying your loan, a term plan with a decreasing cover feature is the best choice. This is because your liability towards the loan decreases when you’re in the process of repaying it. The sum assured under this plan will reduce in tandem.

In the unfortunate event of your demise, when the policy is active, the insurance company will provide a claim payout to your family. They can utilise this amount to repay the outstanding loan or any other liabilities you have.

For example, Rohan, 45 years old, has a home loan. His wife and kids are dependent on him financially. So, he decides to buy a decreasing term insurance plan as it would align with the decreasing outstanding balance of his loan over time. He opts for a sum assured of Rs. 1.5 crores for a period of 35 years. As per the policy terms and conditions, the sum assured will keep decreasing at the rate of 10% every 5 years until it reaches 50% of the original base cover.

Now, let’s see how the sum assured will reduce under the decreasing term insurance plan

This is how the sum assured will decrease under the decreasing term insurance bought by Rohan. Now, in case Rohan passes away within the policy duration, the sum assured of that year will be paid to his family. For example, if he passes away in the 14th year, his family will receive a sum assured of Rs. 1.2 crore. They can use the amount to comfortably pay off the home loan.

2. Regular Term Plan

A regular term plan offers coverage for a defined duration, referred to as the 'policy term.' The cover amount remains constant throughout the policy term. If you pass away within the policy term, your loved ones will receive the predetermined sum assured, regardless of the outstanding loan balance. This means that the coverage offered by a regular term plan extends beyond the home loan and takes care of other financial responsibilities your family may have, such as children’s education, marriage expenses, household expenses, etc.

So, with a regular term plan, your family members can also address their other financial needs while repaying the home loan.

For example, Lokesh, 30 years old, lives with his wife and 2 children. Since he is the primary breadwinner, his family relies on his income for all their financial needs, like monthly bills, house rent, children’s education, etc. He also has an outstanding home loan. So, he decides to buy a term plan to ensure his family’s financial stability. He opts for a sum assured of Rs 1 Crore for a duration of 25 years. This amount will help his family clear all his dues and take care of their financial needs - in case something unfortunate happens to him.

📝 Important Point To Note

When you are securing term insurance for a home loan, you should assign the policy to the lender for the outstanding cover. So, in case you pass away during the policy term, the claim amount equivalent to the outstanding cover will be first paid to the lender. Any remaining sum will then be paid back to your family, freeing them from the debt burden. This creates an efficient way of paying back your loan and providing your family with a sense of financial relief, allowing them to focus on other important matters.

5 Things To Do When Purchasing A Term Plan For Home Loan

Here’s a list of the things you should do if you are buying a term insurance for mortgage loan -

1 Calculate The Right Cover Amount Before purchasing a term insurance plan, it is essential to calculate the cover amount accurately. This amount should adequately meet your family's financial needs, ensuring their comfort and well-being in your absence.

2 Choose The Lump-Sum Payout Option

Most term insurance policies offer customisable claim payout options. Generally, you will find three choices available: monthly income, lump sum, or a combination of both.

If your primary objective for purchasing a term plan is to repay your home loan, the lump-sum claim payout option is the best choice. Under this option, the claim amount is paid in a single go as a lump sum. A portion of this sum is allocated to settle the outstanding loan with the bank. The remaining amount, if any, is disbursed to your family, providing them with essential financial support.

However, if you have a home loan to cover and also want to address other financial needs, opting for a combination of a lump sum and monthly income option would be the most suitable choice. The lump sum will help your family repay the loan while the regular monthly income will help cover their everyday expenses such as EMIs, utility bills, etc.

3 Choose A Policy Duration To Match The Duration Of The Loan Repayment The policy term or duration refers to the time period during which your term insurance policy remains in effect, given that you fulfil all premium payments in a timely manner. When selecting a term insurance plan just to cover your home loan, it is essential to ensure that the policy duration is, at minimum, equal to the repayment period of your loan. This will ensure that either you or your term plan can successfully clear the outstanding loan amount, thereby eliminating the burden of repayment on your family under any circumstances.

4 Take Your Family Through The Policy Details You may not always be present to support your family. Therefore, it is essential to engage in open and transparent communication when purchasing a term insurance plan. Take the time to sit down with your family, particularly the nominee, and explain the policy you have chosen, walking them through all the details. By doing so, you provide them with a clear understanding of the claim settlement amount and the process involved. It will empower them to make informed decisions and be well-equipped ahead of time.

5 Keep All The Documents In One Place

It is vital to maintain all your policy documents and other essential paperwork in a single, secure location. By doing so, you can ensure easy access to these documents whenever necessary, eliminating any potential complications during the claim settlement process.

Term Insurance vs Home Loan Insurance

Home loan insurance is usually provided by banks and other financial institutions that offer home loans. The plan is generally bundled with your loan and provides coverage till the loan is repaid and the cover amount keeps on decreasing over time. If you pass away during the policy period, the cover amount will be used to close the loan.

Term insurance varies from home loan insurance in the aspect that the cover amount can be used for both paying off any loans and financial responsibilities beyond that like monthly bills, education fees, etc. if any. The plan helps your family live a financially stable life even in your absence. Also, compared to a home loan insurance plan, a term insurance plan is cheaper.

Best Term Insurance For Home Loan

If you’re looking for a term insurance plan that will protect your loved ones from shouldering the burden of a home loan, here are two pretty great options -

1. ABSLI DigiShield Plan [UIN: 109N108V11] An online term insurance plan that gives your loved ones financial support in your absence. It’s a good option for any life stage - whether you are single, married, have a loan, etc. You can choose how the claim amount will be paid out and add riders to your base plan. It comes with features like life stage protection, sum assured reduction, etc.

2. ABSLI Anmol Suraksha Kawach [UIN: 109N139V01] A term insurance plan with a short policy period. It covers you for a duration ranging from 2 to 5 years, based on your preference. It gives you a life cover along with other benefits to keep your family financially secure from any short-term obligations like home loans in your absence.

Conclusion

While it is difficult to imagine a world without your presence, securing your family's financial well-being is highly important, especially when you have a substantial liability - a home loan. A term insurance plan can help you do that. All you need to do is choose the right plan and cover amount to ensure that your loved ones don’t have to bear the burden of loan repayment. It is a simple step towards ensuring their financial stability when you won’t be around them.