Home / Money / Personal Finance /  Should you opt for home loan insurance or a term plan?

The real estate market is witnessing a rebound in demand after two years of the covid pandemic, with many consumers looking to buy their dream home now. Some are even searching for larger houses to accommodate a work-from-home routine. Are you one of those wanting to buy a house and if so will you be opting for a home loan? In case it is the latter, the next question that needs to be addressed is: Will you be buying a home loan insurance or a term loan to protect you from any unforeseen financial liability.

Do note that If you were to purchase a house with a home loan, you will need to cover the liability with insurance equivalent to the loan amount. Such liability can also be covered with a term loan. However, what you need to know is whether the benefits of a term loan outweighs those of a home loan insurance.

Experts say that if your liability merely extends to your home loan, then you can consider buying home loan insurance as the sum assured decreases based on the reduction in outstanding loan.

However, a term plan ensures protection towards debt obligations in a broader way, including the home loan and other types of loans and liabilities.

“Home loan insurance is similar to a life or term insurance plan. The only difference is that the home loan cover amount keeps reducing as the loan tenure progresses," says Sajja Praveen Chowdary, associate director, Policybazaar.com.

“For instance, let us assume you take a 1 crore loan today along with a 1 crore home loan insurance. With this, your life is covered (via home loan insurance) for 1 crore, but this amount keeps reducing every year as you pay the equated monthly instalments (EMIs) to the bank. In case of the policyholder’s death, the insurance company pays the bank the sum assured for that year. If it's higher than the outstanding loan, the nominee gets the remaining amount; if it’s lower, the nominee has to pay the remaining amount to the bank,“ he explained.

For instance, if the insured misses paying any equated monthly instalment (EMI) in between, the outstanding loan amount will increase. Then, the home insurance policy may not cover the entire outstanding. Moreover, the nominee will have to bear such additional costs if some misfortune befalls the insured in that particular policy period.

Tax benefit: “If you have taken a housing loan and a life insurance policy (home loan insurance policy) to cover the housing loan repayment, in case of any unforeseen circumstances in the future, you can claim a tax deduction under section 80C on the premium paid for the home loan insurance, provided it is a life insurance policy (subject to compliance with other conditions like premium not exceeding 10% of capital sum assured) and not a general insurance policy covering risks like fire, earthquake, floods, job loss, etc," said Amarpal S. Chadha, tax partner and India Mobility Leader, EY.

Mint Take

You must check your liabilities before deciding between a home loan insurance and term insurance. A term plan is a comprehensive cover that offers a fixed death benefit which you can utilize for any need. However, home loan insurance only covers the outstanding loan amount. As a result, when you repay the loan over the course of the policy, the sum insured will decline until it is zero.

Point to note:

Home insurance differs from home loan insurance as the former covers your building structure, belongings inside your house, or both, depending on the policy. Typically, it protects your home and belongings from damage or loss due to natural calamity, theft, etc. With home loan insurance, the quantum of the cover is linked to the loan amount. You will get the sum assured to the extent of the loan amount.

Navneet Dubey
Navneet Dubey is a personal finance writer and artist. Over the past decade, he has written feature stories on insurance, financial planning, lending and borrowing.
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