India is a thriving country where individuals are rapidly rising up the economic ladder. A home is one of the most common purchases that people make when their income grows. Most people who want a house opt for a home loan to fund the purchase. However, the nature of a home loan is vastly different from that of other types of financing. The average tenure of a home loan is generally 20 years or more. Therefore, a home loan effectively creates a long-term liability for you and your family. Furthermore, throughout one’s earning years, a home loan is not the only debt one has; there are also medium and short-term borrowings such as auto loans and credit card expenses.
Household debt in India has seen a dramatic rise due to increased borrowing in recent years. Getting a home loan to buy a house is a wise move, but you must consider the repayment schedule and plan for all possibilities.
Just got a new house? Get Term Insurance!
As mentioned, Home loans are often long-term contracts lasting 20 to 25 years. The basic assumption in this arrangement is that the borrower will be working and receiving a steady income during the loan payback period. However, we cannot foretell the course of life. If one’s monthly income is cut off due to unanticipated circumstances, this EMI can become a financial hardship to one’s family. This is why a term plan is essential for new homeowners who have taken a home loan.
In the event of the borrower’s untimely demise, the proceeds from a term insurance plan can shield their family from the financial strain of repaying the home loan. As a result, the family can repay the remaining balance of the home loan with the death benefit. Let’s go over in detail how term insurance protects house loans.
Home Loans and Other Liabilities
Nobody takes out a loan with the aim of defaulting, but many things can go wrong during the tenure of a loan, particularly a long-term loan like this. After the loan is disbursed, the borrower’s responsibilities begin. Every month, a specified installment must be paid, comprising a portion of the principal amount and interest. For example, if you avail a Rs. 25 lakh home loan at 9% interest for a tenure of 20 years, you will pay Rs. 22,525 every month. The obligation exists until the entire loan is paid off. However, some people default during the loan’s term, owing to causes such as:
- Critical Illness
- Loss Of Income Due To Disability
Consequently, the borrower’s family suffers the most when there is a default on a loan owing to the death of the breadwinner. Basic term insurance against a house loan could offer funds for debt repayment in case of the insured’s untimely death. However, you must also consider the other two key examples of default. Riders can be purchased when purchasing term insurance to protect against loss of income due to disability or critical illness.
How Can You Ensure Your Term Plan Provides Financial Safety Against A Home Loan?
A term plan’s versatility is one of its most significant advantages. Depending on your plan’s terms and conditions, you can opt for the sum assured to be paid out to the nominee(s) in regular installments to replace monthly income or as a lump sum amount.
The ideal coverage for the liability of a home loan should be greater than the amount required to offer a comfortable life for your family. Your sum assured should be at least ten times your annual salary plus the outstanding balance on your loan. The policy tenure should also last till the time the loan is active.
You can calculate the premiums for the desired coverage amount using a term insurance premium calculator online.
Select decreasing term insurance
A regular term insurance policy’s sum assured remains constant during the policy’s duration. Similarly, term insurance premiums are fixed for the entire policy term. However, if the goal is to buy a term plan to cover a housing loan liability, a fixed sum assured may not be the best option.
As you begin paying monthly installments, the outstanding amount of the home loan gradually decreases. Therefore, keeping the same insurance coverage for the duration of the house loan is not required. However, once a standard term insurance plan is purchased, the sum assured cannot be reduced. Therefore, decreasing term insurance may be a preferable solution to provide cover for the liability of a home loan. The sum assured with this term insurance decreases monthly or annually until the policy expires. The premium for decreasing term insurance plans is the same as for conventional term insurance policies.
The appropriate quantity and type of insurance might assist you in covering the loan on your dream home. In addition, it will ensure that your family is not burdened by debt if you meet an untimely demise. When purchasing term insurance online, you may choose decreasing term insurance to align the outstanding loan balance with the insurance cover.