Home loan is a huge financial commitment. Many home owners are concerned about the plight of their dependents in case anything happens to them. How would the family be able to make large EMI payments in case of death of the breadwinner? Saddled with the burden of debt, they might be forced to sell the house. Home loan insurance lends the borrower peace of mind and assured financial comfort for his loved ones.
This insurance seems unnecessary if the home owner has no dependents or has other working members to share his financial burden in distress scenarios. In many families where there is only one breadwinner, home loan insurance is a prudent decision.
Insurance for home loans comes in many flavours and interesting variations. But the basic purpose of this product is to provide your family the support of insurance cover to repay the outstanding on the home loan. The family is not burdened by EMIs for the borrowed money.
In case, the borrower opts for the insurance cover from the same bank, both the premium and EMI amount are clubbed together. This makes the entire insurance process and future transactions easier for the homeowner. What are the determinants of the premium? The age of the applicant is a critical factor. Older people are charged higher premiums usually compared to the younger. People with medical history like heart attack are placed on the high risk category and have to bear higher premiums . A young individual with perfect health condition pays lesser premium to the insurer.
A more critical factor deciding premium amount is loan amount and tenure. A home loan taken for a long tenure attracts higher premium . This is because the insurer takes a higher risk over the prolonged period of loan repayment.
Sometimes the option of a term insurance is more appealing . The home loan amount can be construed as the fixed sum assured. In case misfortune befalls the breadwinner, the fixed sum assured is retuned to the family. They can clear the home loan debt with this sum and keep the rest of the money with them.
On the contrary, most home loan insurance products are based on reducing outstanding loan amount. As time elapses, the debt on home also comes down. The insurer will only disburse the outstanding loan amount.
In case of rising interest rates, the tenure of the loan also increases. One has to read the terms and ensure the insurance takes care of increases in tenure owing to rate fluctuations. What would happen to the cover of insurance in case you switch a lender? How would the disbursement be made to the bereaved family and what would be the amount? Is a term insurance a better option for you rather than a cover based on reducing outstanding loan? Home owners must gather all this information and select a policy that suits their family's financial needs. A policy taken in haste may not meet its required objectives.