5 MinsDec 28, 2020
Neeraj Roy, 30 years, is looking to buy a house. He has qualified for a home loan of Rs. 40 lakh. But his bank has recommended that he also buy a term life insurance plan to cover his home loan. While it is not compulsory to buy insurance, Neeraj's
Relationship Manager (RM) at the bank has advised him that it is prudent to do so. Neeraj already has a whole life insurance policy. Should he incur the additional expense of a term plan to cover the loan?
Is a term life cover necessary?
Home loans are big-ticket loans. As we have seen in Neeraj’s case, the amount is Rs 40 lakh. Second, they are long tenure loans. The loan Neeraj is considering is for 15 years. What if something was to happen to him during this long duration?
His family would have to shoulder the responsibility of repaying the loan. If his family is unable to repay the loan, the bank would repossess the flat, and his family would be homeless. A term life insurance policy covers these risks.
How much coverage should Neeraj take on his life insurance?
Since Neeraj already has a whole life insurance to cover the future financial needs of his family, he should ideally buy a term life insurance policy that is equivalent to his home loan plus 10%.
This is to ensure that the insurance payout would cover any other financial obligation he may have, such as an auto loan or a personal loan.
Some lenders offer a home protection plan. How does that work?
Some lenders bundle life insurance plans that double up as a home protection plan. Here, the life cover reduces as you keep repaying off your loan. The life cover is relative to the principal amount pending on your loan.
This has both pros and cons. The plus point is that the premium on a home protection plan gradually decreases, as against a term life plan, where the premium stays constant. This is because the risk associated with default on the home loan decreases with every EMI that is paid. The disadvantage is that it only covers the risk of the home loan repayment, not other loans that Neeraj may have.
[Also Read: How to start saving for your retirement]
Neeraj already has a whole life insurance policy. Why should he get another?
Neeraj had purchased the whole life insurance policy intending to leave a decent corpus for his family in his absence. However, if a large chunk of that policy were to go towards repaying the outstanding home loan, it would leave his family with
a much lesser sum for their future use. Another term life policy, therefore, makes sense.
What if Neeraj changes lenders after ten years? Will that affect his insurance?
No, it won't. Neeraj is buying a term life insurance policy from a life insurance company. The insurance company doesn't care who his lender is; his insurance benefits stay the same.
But what about the extra cost?
This is, actually, the absolute clincher in favour of the additional term insurance policy. Consider this: Neeraj's monthly instalment on his home loan of Rs. 40 lakh for 15 years is likely to be in the Rs. 35,000-40,000 range. A term life insurance
for Rs. 50 lakh, assuming he is a non-smoker, will cost anywhere between Rs. 600-800 per month (depending on the insurance company he chooses).
What this means is that for an additional outgo of just 1.5-2%, over and above his home loan EMI, he can rest assured, knowing that he has taken care of his family. An absolute no-brainer in financial planning terms!
Axis Bank has tie-ups with multiple life insurance companies – Max Life, Life Insurance Corporation of India and Bajaj Allianz Life. You can check out their term loan plans by visiting website. Additionally, you can also get an estimate of your insurance premium using Axis Bank's life insurance calculator.
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