Buying your own residential property is a dream come true. In the first decade of our work lives, we strive hard to save up, invest right, get the big hikes or bonuses and then one day, all this effort translates into a downpayment on that wonderful property we plan to call home. You've kept a meticulous credit score, and with your earnings, any bank or NBFC will be keen to approve your home loan, right?
Taking a home loan is a long-term debt. It comes with a host of advantages, such as tax deductions. In addition, it allows you to buy an asset that will appreciate considerably by the time you have paid off the loan. But with a home loan comes a nagging concern too. What if you are, for some reason, unable to pay it off? What if sickness, disability, or death becomes an impediment to the repayment? What happens to your financial plans or your family's security?
This is where insurance offers a lifeline to homebuyers. But which insurance should you opt for? What are the possible benefits or disadvantages of buying insurance with your home loan? Let's find out.
As a prospective home buyer, you should first know that buying insurance with your home loan is preferable but not mandatory. Many lenders offer home loan products at attractive rates but make it compulsory for loan seekers to take additional insurance and pay an exorbitant premium that negates any benefits they may gain from lower interest rates. In such cases, exploring other banks or financial institutions willing to lend funds without buying insurance may be a good idea. Having said this, it is definitely a good idea to buy insurance separately to cover any risks.
A home loan is a large financial undertaking. By taking the loan, you commit to repay the principal and interest in monthly instalments over the years. Home loan tenors may run for 10-15 years. The bank or NBFC that has agreed to lend you the funds uses the house or property you buy as collateral.
So until you have paid off the loan and received a NOC or No Dues certificate, the property is mortgaged to the lender. So what happens in case of the unexpected death of the borrower? The family and dependents of the buyer may not be able to fulfil the financial obligations of the loan and may stand to lose the property in addition to the loss of income. Insurance indemnifies the borrower against this risk. Homebuyers typically have two different insurance products to choose from when taking a home loan –
Home loan insurance is specifically designed to cover your home loan debt. This means that you start to pay both the EMIs and the premium amount each year, but the sum assured covered by the loan decreases as your home loan amount is paid off and as the tenure progresses. This is because your home loan insurance only covers the home loan outstanding debt burden. This makes the premium amount much lower than term insurance.
Term insurance is a traditional product in which your life risk is covered over a long term, say 3-4 decades. As long as the premium is paid on time and the policy is kept active, the insurer is liable to pay the sum assured to the nominee in case of the insurance holder's death. This sum assured does not vary or reduce. Therefore, it is not linked to the debt burden of the insurance holder. Many insurance companies also offer policyholders the option of taking life-long coverage, but the premiums are higher in these cases.
Term insurance is a better product for securing the financial future of your family and dependents. However, in this case, the premium can be much higher than a home loan insurance. So, the choice between the two will depend on your cash flow and ability to pay the EMI and insurance premium on time.
While both term insurance and home loan insurance products cover the policyholder's death, it is important to consider critical illness or disability, particularly if you are at a high health risk. These may be important reasons for being unable to pay off your home loan debt. Most insurance companies cover this risk with additional riders you can opt for when buying insurance. Young home buyers prefer to take an insurance policy that allows them to add on these riders as they age, thus bringing down the initial premium amount.
Planning for your family's future and securing your investment in residential property or real estate may require some planning and research. It is a good idea to consult a financial advisor specialising in home loan and insurance planning.
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