Do Not Miss Term Insurance Plan, If You Have Loan
Many people say that nothing in life goes the way we wanted it to be. This is because life is unpredictable and you can never be sure for your future. There are times when your plans do not go the way you wanted them to be. So, it is recommended to be prepared for the worst beforehand. One of the biggest nightmares that anyone can have is what will happen to my family in my absence. One way to make your family financially secure when you are not around is by purchasing a term insurance plan.
Moreover, you do not have to worry about the repayment of the loans that you have taken such as home loan, education loan for your children, etc. This is because there are various best term insurance plans for home loan protection available in the market.
What exactly is the Term Plan?
A term insurance plan is basically a life insurance policy but with a limited validity, which is known as ‘Term’. The policy basically lasts for a pre-defined period and then expires; hence you will not be covered after that. After the expiry, you can either purchase a new policy or renew the older one.
In this way, if you survive the policy tenure, then the term plan will not give you any survival or maturity benefit. However, to overcome this loss, the insurance companies came up with a solution sometimes back. As per this solution, the company pays back a certain portion of the total premium that you have paid.
The payout options that a term insurance plan provides are:
- You can get the death benefit as lump sum (paid one time) amount or as a staggered payout (which is regular income) or increasing regular income, or both lump sum and regular income.
- In case of lump sum amount, the nominees get entire lump sum amount at one-go and the contract with the insurance provider gets over then and there.
- In case of regular income, the entire claim amount is paid in parts for many years until the amount gets over.
- Before selecting, staggered income option, you must select an amount that will provide an adequate income to your family in your absence.
- The tenure of the term insurance plan must cover the time span in which you are intending to work. This means it should at least cover 65 year
Both the options of sum assured have different benefits, but one of the biggest advantages of taking death benefit as a lump sum is the payment of your loans. Suppose, you have taken a home loan and you die unexpectedly during the tenure of your term plan. In this case, you can use the amount of your term insurance for home loan payment.
Therefore, before selecting a payout option for your term insurance plan, it is suggested to understand the requirements of your family:
- If you have taken a home loan: Safeguarding your home loan with a term plan is as necessary as paying on time EMI of your home loan. So, if your home loan is high, then it is suggested to opt for the lump sum option.
- If you have taken an education loan for your child: The EMIs of education loan is comparatively lesser than a home loan. Therefore, in this case, you can opt for a monthly income option. This will help your family to payout the EMIs regularly from the term insurance’s payout without affecting their monthly budget.
- If you have taken two-wheeler/car loan: The two-wheeler loan can easily be paid out by regular income option. However, the car loan can be expensive, so in that case, you can select the option of both lump sum and regular income.
- If you have taken a personal loan: Usually, personal loans have smaller repayment tenure. However, it depends upon the loan amount to decide the payout option in this case.
Home Loan Protection Insurance Vs Term Insurance Plan
When you opt for a home loan, you may notice the option given by your loan provider of a life protection policy for covering the loan when some emergency occurs. These life protection plans help your family members to repay the loan amount when an unfortunate event occurs.
There are two main products that are offered under this category –Home Loan Insurance or Home Loan Protection Plan and Term Insurance. Your loan provider may force you to purchase Home Loan Protection Plan over term insurance policy. However, finalizing one should be your own decision. Here we are providing a comparative analysis of these two insurance plans so that you can take an informed decision easily:
|Term Plan||Home Loan Protection Plan|
|Cost of Premium||Rs.8, 000 to Rs.15, 000 for term plan of Rs.1CR||Rs.50, 000 for the home loan of Rs.1CR|
|Life Cover||Death benefits that help to repay the loan and maturity benefits if the insured outlives||Covers the home loan that is being sanctioned. The life-cover declines and reduced to zero as the loan gets repaid.|
|Tax Benefits||Tax deduction under section 80C||Tax deduction under section 80C|
|Add-On Covers||Riders for disability and terminal illness are provided.||Riders for disability, joblessness, and terminal illness.|
|Cover Modification||Tenure modification is available and easy to apply.||Tenure modification is not available.|
HDFC Life Home Loan Protection Plan
It is a traditional term plan that is decreasing in nature and is provided without any bonus facility. This plan helps the family of the policyholder to repay the outstanding home loan amount in case of unfortunate death of the policyholder.
How does HDFC Home Loan Protection Plan Work?
The premium here is paid as single premium; however, if the insured wants then the premium can also be incorporated with the EMI of the home loan. The policyholder can choose the sum assured as the total outstanding amount of the home loan that keeps on decreasing in percentage as per the schedule of the policy.
Key Features of HDFC Life Home Loan Protection Plan:
- It is a term insurance plan that is decreasing in nature and provides only ‘Death Benefits’.
- This plan offers a single premium payment option.
- The premium can be added in the loan payment and hence can be paid as installments.
- The sum assured keeps on decreasing as per the schedule of the policy.
- This plan does not have any maturity benefits.
- In the unfortunate event of policyholder’s death, the policy repays the entire outstanding amount to the loan lender of the policyholder and the plan terminates immediately.
SBI Term Insurance for Home Loan:
In this fast-paced life where everything is very expensive, purchasing a house by giving complete payment is a dream for almost all. Therefore, everyone who purchases his/her house has to take some amount as loan. This loan is given for a fixed tenure by the loan lender and the person who has taken the loan dies during this tenure, then his/her family has to bear the burden of this loan repayment. However, to safeguard your family from such financial discomfort in your absence, it is good to take the Home Loan Protection Plan of SBI.
Life Insurance Plans to Repay Home Loans from SBI Life Are:
SBI Life term plans aimed to provide financial protection in case of an unfortunate event like the death of the person who has taken the loan. The options provided by SBI under this plan are:
SBI Life Saral Sheild
It is an affordable term insurance policy that provides the option of variable payment and decreasing cover. This plan is ideal for home loans that are paid off regularly. With the decrease in the loan amount, the amount of the premium also decreases.
SBI Life e-Shield
A term insurance plan with the facility of low premium amount is SBI Life e-Shield. This insurance plan provides life insurance benefit and accidental death cover to repay the home loan.
Reasons to Not to Buy Home Loan Protection Plan
Home Loan Protection Plan is a single premium term insurance policy that pays the outstanding loan taken for home at any time. For example, if one takes a home loan of Rs.50Lakh and also purchases Home Loan Protection Plan for covering the home loan, then if something happens with the policyholder after four years, then the outstanding amount will be paid by the insurance company. In this way, the family of the insured does not need to worry about home loan taken. However, experts suggest not opting for a home loan because of the following reasons:
- Home Loan Insurance is Expensive than Term Plan: It is observed that the premium of home loan protection plan is expensive than the premium of term plan. For example, if you take a home loan protection plan then it will cover your loan amount with an approximate premium of Rs.1.3 Lakh for five years. However, if you check the Term Plan to cover your same home loan amount, then the premium that you have to pay for it is approximately Rs.12, 000 for a year. This will be Rs.48, 000 for five years. In this way, you can easily see that the premium of your home loan protection plan is approximately 2.7 times more than pure term plan. This is not the exact ratio and may vary as per the case, but roughly it will be as mentioned above.
- Home Loan Protection Plan is a Single Premium Policy: One of the biggest disadvantages of Home Loan Protection Plan is its single premium nature. Most of the times, your home loan provider projects this in a way that you need not pay anything extra for this insurance cover. This is because the premium of this policy is added in the amount of your home loan and you have to pay it with the monthly EMI. Consecutively, you end up paying more amount than the term insurance plan.
- The Home Loan Protection Plan is Depleting in Nature and is Not Constant: You can understand this point with a very good example of two friends Suresh and Ramesh. These two friends have taken a flat in the same apartment by taking the home loan of Rs.60 Lakh. However, Ramesh opted for Home Loan Protection Plan with the home loan, whereas Suresh has taken a Term Plan of Rs.60 Lakh. Unfortunately, after four years both these friends died in the car accident. In that situation, the loan outstanding of both the families was Rs.46 Lakh (for Home Loan). However, on one hand, where Ramesh will get only Rs.46 Lakh to repay the loan amount, the family of Suresh will get Rs.60 Lakh. Out of these Rs.60 Lakh, they can repay the loan amount of Rs.46 Lakh and rest of the Rs.14 Lakh, they can use for their personal work as education or marriage of children. It must be clear to you by now that Home Loan Protection Plan is depleting and is not constant in nature.
- Death Under Suicide or Natural Reasons are Not Covered in Home Loan Protection Plan: Natural death is the death that is caused due to some illness or internal malfunction of your body organs such as heart attack, death because of some complications such as infection. While term insurance plan covers natural death and suicide after the commencement of policy for one year, both these conditions are not covered in the Home Loan Protection Plan.
- Home Loan Protection Plan becomes Null and Void If You Switch Your Loan Lender: The Home Loan Protection Plan becomes null and void if you port your loan lender. There are many loan lenders who provide loans at the lesser interest rate. So, if you find such plan and want to move your loan from your previous loan lender to the new one, then not only your Home Loan Protection Plan will become null and void, but the premiums that you have paid will not be refunded.
- Home Loan Protection Plan becomes Null and Void If You Reduce the Tenure of Your Loan Term: Suppose you have taken a home loan for five years, but you paid it off in three years only. In that case, your Home Loan Protection Plan will become null and void. Moreover, you will not get any refund in the premium as well.
Summing it Up!
In this way, the choice of your payout option decides the future of your family members in your absence. Term insurance is one of the best options to give to your family for meeting their day to day expenses and make payments of the loan in your absence.