India is a prosperous country where people are rapidly climbing the economic ladder. A home is one of the most common purchases people make as their income increases. Most people who want a home opt for a home loan to finance the purchase. However, the nature of a home loan is very different from that of other types of financing. The average term of a home loan is usually 20 years or more. Therefore, a home loan effectively creates a long-term liability for you and your family. Plus, throughout your earning years, a home loan isn’t the only debt you have; there are also medium- and short-term borrowings such as car loans and credit card fees.
Household debt in India has seen a dramatic increase due to increased borrowing in recent years. Getting a home loan to buy a house is a wise decision, but you need to consider the repayment schedule and plan for all the possibilities.
Have you just bought a new house? Get term insurance!
As mentioned, home loans are often long-term contracts lasting 20-25 years. The basic assumption of this arrangement is that the borrower will work and receive a stable income during the loan repayment period. However, we cannot predict the course of life. If a person’s monthly income is cut off due to unforeseen circumstances, this NDE can become a financial hardship for their family. This is why a term plan is essential for new owners who have taken out a mortgage.
In the event of the premature death of the borrower, the proceeds of a term insurance plan can protect their family from the financial difficulties associated with repaying the mortgage. As a result, the family can repay the remaining balance of the mortgage with the death benefit. Let’s take a closer look at how term insurance protects home loans.
Home loans and other liabilities
No one takes out a loan with the intention of defaulting, but a lot can go wrong during the life of a loan, especially a long-term loan like this. After loan disbursement, the borrower’s responsibilities begin. Each month, a fixed installment must be paid, comprising part of the principal amount and interest. For example, if you are availed of a Rs. 25 lakh home loan at 9% interest for a term of 20 years, you will pay Rs. 22,525 every month. The obligation exists until the entire loan is repaid. However, some people default during the term of the loan, due to causes such as:
- critical illness
- Loss of income due to disability
Therefore, the borrower’s family suffers the most when there is a default due to the death of the breadwinner. Basic term insurance against a home loan could provide funds for debt repayment in the event of the premature death of the insured. However, you also need to consider the other two key default value examples. Riders can be purchased when purchasing term insurance to protect against loss of income due to disability or critical illness.
How can you ensure that your term plan provides financial security against a home loan?
The versatility of a term plan is one of its most important advantages. Depending on the terms and conditions of your plan, you can choose to have the sum insured paid to the applicant(s) in regular installments to replace monthly income or as a lump sum.
The ideal home loan liability coverage should be more than the amount needed to provide a comfortable life for your family. Your sum assured must be at least ten times your annual salary plus the outstanding balance of your loan. The duration of the policy should also last until the time the loan is active.
You can calculate the premiums for the desired coverage amount using a term insurance premium calculator on line.
Select decreasing term insurance
The sum insured of a regular term insurance policy remains constant for the duration of the policy. Similarly, premiums for term insurance are fixed for the entire duration of the contract. However, if the goal is to purchase a term plan to cover a home loan liability, a fixed sum insured may not be the best option.
As you begin to make monthly payments, the outstanding amount of the home loan gradually decreases. It is therefore not necessary to maintain the same insurance coverage throughout the duration of the mortgage. However, once a standard term insurance plan is purchased, the sum insured cannot be reduced. Therefore, decreasing term insurance may be a preferable solution to cover liability for a home loan. The sum insured with this term insurance decreases monthly or annually until the policy expires. The premium for decreasing term insurance is the same as for conventional term insurance.
The right amount and type of insurance can help you cover the loan for your dream home. Additionally, it will ensure that your family is not in debt if you meet an untimely death. When purchasing term insurance online, you can choose decreasing term insurance to align the outstanding loan balance with the insurance coverage.