Buying our own house is a dream for many. It takes a lot of discipline, planning, and sacrifices to make this dream into reality. Many people cut down their expenses, compromise on luxury, take a home loan and pay EMIs for years to live this dream. There is also the added risk of the investor experiencing an unforeseen medical emergency or tragedy that could put the housing investment itself at risk. During the payment tenure, if anything happens to the borrower, the burden of repaying the EMIs falls on the family. This is where Term Insurance and Home Loan Protection come into the picture. Let us understand how these plans work and how they might save you from a financial fiasco.
Term Insurance
Term insurance is a type of Life insurance wherein the insured person covers himself for a specific period; in this case, for the loan tenure. This policy can be attached to the Home Loan and if something happens to the insured within the tenure and if the policy is still in force, then the insured amount will be paid to the bank. Thus securing your family and home from any unforeseeable situation.
Home Loan Protection
A Home Loan Protection Plan was introduced by banks in order to secure loans. The plan works in such a way that in the event of the borrower’s death or disability, the loan is reimbursed by the insurance company rather than the dependants.
Let’s understand this better with the help of the example of Mr. Sunil.
Sunil has an annual income of Rs. 6 lakhs and he took a home loan of Rs. 40 lakh for the dream house he recently purchased. Sunil being a financially literate person bought a Term Insurance Plan of Rs. 1 crore. He knew this 1 crore sum assured would cover 60 lakhs (10 times his annual income which isn’t linked to his Home Loan) and 40 lakhs (Home Loan). This 1 crore would take care of all the financial requirements of his family as well as the home loan in case of any misfortune.
Why a Term Insurance Plan is better than a Home Loan Protection Plan?
1. Sunil after a few years decided to foreclose his Home Loan.
– If Sunil had bought Home Loan Protection
As soon as his loan gets repaid, his life cover becomes nil even though he had paid the premium for the entire loan tenure. His insurance coverage becomes nil and the premium paid gets wasted. He would now not have any life cover which is a must as long as he is an earning member of the family.
-If Sunil had bought a Term Insurance
Even after foreclosure, his risk cover stays intact as long as he keeps on paying the premiums. This protects him and his family from any unforeseen situation even after the loan is over.
2. Sunil finds better interest rates and decides to change his Home Loan company.
-If Sunil had bought Home Loan Protection
The policy which was purchased during the inception of the loan gets void. The premium which is paid for the entire tenure of his loan protection gets wasted.
-If Sunil had bought a Term Insurance
Since his Term Insurance isn’t linked to his loan, he would have had the flexibility to change the loan company without compromising his risk cover.
3. Sunil meets with an unfortunate fatal accident.
-If Sunil had bought Home Loan Protection
His loan would be repaid by his insurer. This amount can’t be used for any other purpose since its sole purpose is to provide protection against his loan.
-If Sunil had bought a Term Insurance
Since this policy isn’t linked to Sunil’s Home Loan, Sunil’s family has the liberty to decide how to use these funds depending on the need of the hour.
Both plans work on similar fundamentals but are significantly different from each other. Let us understand the key differences between the two. This comparison will give you clarity on which plan would be better suited for your needs.
| Parameter | Term Insurance | Home Loan Protection |
| Aim | Pure risk cover | To protect a home loan |
| Affordability | Relatively cheaper | Relatively higher |
| Absolute cost | Relatively higher | Relatively lower |
| Cover | Remains constant throughout the tenure | Decreases with the payment of each EMI |
| Change of insurers | If unhappy, you can switch between insurers | No such option is available |
| Flexibility | You can increase your coverage with the increase in your income | No such option is available |
| Riders | Various riders are available | No riders |
| Tax benefits | Under section 80 C | Under sections 24 B, 80 EEA, and 80 C |
| Add ons | Various add ons available depending on the plan and the company | Available |
| Coverage | It is an umbrella cover and hence death benefit can be availed for any purpose | Since it is just a loan protection plan, the cover amount can only be used to repay the loan |
Conclusion
Protecting your family against the loans/debts is the main purpose of your Term Insurance Plan that is linked to the home loan. Though home loan companies also provide home loan protection policies bundled with the home loan, purchasing a sufficient amount of term plan has various benefits over a home loan protection plan.
You can Compare and Buy Term Insurance Plans online on MyInsuranceClub – India’s 1st IRDA-approved web aggregator. Feel free to contact our trained insurance executives for any guidance or assistance.
online on MyInsuranceClub – India’s 1st IRDA-approved web aggregator. Feel free to contact our trained insurance executives for any guidance or assistance.
