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With skyrocketing price of houses, it is almost impossible for a person to own a house without taking a home loan of large amount. In this article I wish to discuss why you should buy a separate life insurance policy to cover the home loan liability and how to go about it.
Since the amount of home loan availed to buy a house constitutes significant portion of monthly income of the household and if god forbid something happens to the bread earner of the family, it becomes almost impossible for the family to run the household leave aside servicing the home loan in such situation.
As a basic principal of financial planning one should buy life insurance to cover all his financial liabilities. When you take a home loan, you create a new financial liability and taking a life insurance policy to cover the home loan liability will ensure that the legal heirs inherit the house and not the home loan liability. This will help the family avoid the twin pain of losing the regular income of the bread earner and having to leave the house, in case sufficient amount is not available to discharge the outstanding home loan.
Let me make it clear that the life insurance policy suggested by me is over and above the regular life insurance cover which you already may have, to protect your family members in case anything happens to you.
How to go about it
The basic advice a financial planner gives is to buy a life insurance through term plan only and not to go for any other insurance product. This advice equally applies here as well. If you are tech savvy and can do online transactions, I will advise you to buy online term plan which are cheaper than regular term plans with no product difference. The tenure of the life insurance policy to be bought for this purpose should be equal to the tenure of the home loan.
The lenders generally insist for a single premium term plan policies which are tailor made for home loan where the amount of insurance premium is included in the home loan and is recovered over the tenure of the home loan through enhanced EMIs. However I would advise you not to go for the single premium policy but opt for an annual premium payment policy.
This is so because in most of the cases, the home loan borrowers do not run their home loan for the whole period but generally prepay the home loan as and when they accumulate required funds. In such a situation the portion of premium already paid under the single premium policy gets wasted because the insurance policy runs when there is corresponding liability outstanding.
Moreover if you are able to get the insurance company to tailor made term plan to over your home loan, you should ask the insurance company to reduce the sum assured in line with the amount of home loan outstanding at the end of each year. This will make your life insurance cheaper and affordable.
Do you have to buy the home loan protection plans from the same home loan lender?
First of all let me make it clear that neither the banking regulations nor any other law mandates that the home loan borrower has to buy a life insurance policy to cover the home loan. However in order to avoid the hassle to take possession of the property and having to auction it to recover the home loan outstanding , most of the lenders insist for buying of a life insurance with the home loan.
Moreover most of the banks providing the home loan either have their life insurance associates or have arrangement with some life insurance companies to sell their product to enhance their income, these lenders insist for life insurance policy through them which is not at all mandatory for you. In case the life insurance policy offered by your lender is not cheapest, you can refuse to oblige. If the lender does not heed, you can ask them to produce in writing the requirement to buy life insurance policy as mandatory and precondition for giving you the home loan. Since the lender cannot give you it in writing they will agree even if you buy a life insurance policy from other insurance company and assign it to them.
Let me make it clear that though buying of a life insurance policy with the home loan is not mandatory, it is in your own interest and the interest of your family members that you buy a term plan to cover the liability on your home loan to ensure peace of mind for you and your family members.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.
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