Home Loan Protection: Term Insurance or Home Loan Insurance

To own a house is a dream that can be fulfilled through different ways. One of them can be by availing a home loan, which is a long-term commitment with repayment period extending up to 25 to 30 years. Considering the uncertainty of life, it is quite natural to get anxious about home loan liability shifting on the family due to unforeseen incidents like the demise of the borrower. A home loan insurance plan helps manage such situations by insuring the home loan amount. The insurance company pays the outstanding loan amount on the demise of the borrower. Thus, on taking a home loan insurance, the family does not have to bother about the non-payment of the loan.

However, many experts also suggest taking term insurance to wriggle out of this situation. An insurance is a safety belt that financially protects the dependents in case of an eventuality striking the earning member of the family. Let us understand the two types of insurance – home loan insurance and term insurance – and their pros and cons in order to take an informed decision regarding staying financially protected.

What is Home Loan Insurance?

A home loan insurance plan can be purchased at the time of availing a home loan and is valid for the loan repayment period. The plan, not mandatory with a home loan, automatically expires, once the loan amount is repaid. The policy is useful in managing the burden of EMI repayments in circumstances such as death or disability (loss of job) of the main earning member of the family or borrower. During such situations, the benefits of home loan protection plan (HLPP) can be claimed by the family of the policyholder to repay the outstanding amount and to not lose the ownership of the house.

What is Term Insurance?

Let’s learn about the other protection plan – term insurance – before weighing the pros and cons of the two. Term insurance, considered a cost-effective plan, provides financial aid to the dependents in case of the sudden demise of the insured during the policy term. However, no benefit is paid, if the policyholder survives the plan. The coverage amount received from term insurance can be used for meeting any kind of financial requirement.

Term Insurance Vs. Home Loan Insurance

The two protection plans that can safeguard the borrower from non-repayment risks are beneficial for both the lender and the borrower. Lets us look at the key differences related to term insurance and home loan insurance.

• Term insurance is way more cost-effective than a home loan protection policy because the premium paid for the latter is comparatively higher. Also, the premium for HLPP is usually one-time payment, which is added to the loan amount. On the other hand, the premium for term insurance is distributed throughout the policy term, making it affordable
• Term insurance provides comprehensive coverage, where the death benefit amount can be used for any purpose by the beneficiary. On the other hand, a home loan insurance only covers the outstanding home loan amount
• Term insurance offers the benefit of increasing or decreasing the coverage amount as per the financial liability. However, this is not possible in case of home loan insurance
• An important feature about home loan is that you can change the loan tenure, depending on the change in home loan interest rates and the borrower’s repayment capability. However, the policy term for HLPP cannot change, even if the loan tenure changes. For instance, when you decrease the home loan tenure to 25 years from 30 years, you cannot change the term for your HLPP policy
• The coverage amount received under HLPP decreases as the loan repayment nears completion. However, this is not so in the case of term insurance. Here, you get the entire benefit amount in case of an eventuality occurring with the policyholder during the policy term
• In case the borrower plans to switch to another lender because of lower home loan interest rate, he/she cannot opt for portability of the home loan insurance provider. This can add to the person’s financial responsibilities

After considering all the conditions, it is clear that the decision of selecting a particular plan depends on the financial requirements of the person. However, many experts recommend term insurance over home loan protection, as the former offers wider coverage, greater flexibility and enables the borrower’s family to tackle financial liabilities better.