Thanks to the booming real estate prices and high interest rates, housing loan EMIs can't be termed modest anymore. That is exactly why everyone talks about buying an insurance cover for the housing loan.
"If something happens to the main borrower and the the family can't afford to pay the EMIs, they can be evicted from the house ," says Suresh Sadagopan, a certified financial planner and founder Ladder 7 Financial Advisories.
"Also with spiralling real estate prices coupled with a huge loan amount, it's in best interest of the borrower to take an insurance cover against the loan," he adds.
There are two ways in which you can cover a home loan. One is through a home loan protection plan (HLPP) and the other one is a pure term cover. Financial advisors recommend a term cover instead of HLPP to cover the housing loan.
"HLPP, often sold along with the housing loan, offers a risk cover (sum assured) equal to the loan amount. As the outstanding loan amount reduces, the size of the cover also reduces," says Pankaj Mathpal, certified financial planner & Managing Director, Optima Money Managers.
For a 20 year housing loan of Rs 50 lakh at 9.5%, HLPP (with a sum assured of Rs 50 lakh) will cost around Rs 1,72,650. Usually it is a single premium policy. By December 2017 the outstanding loan amount would be over Rs 41 lakh. "If the borrower dies at this stage, the insurer would pay off the balance Rs 41 lakh directly to the bank or the borrower's family and the loan is closed," says Pankaj Mathpal.
In case of a term cover (of Rs 50 lakh), the family would get the entire sum assured of Rs 50 lakh. "Even after settling the loan amount, the family can still make a saving of Rs 9 lakh," says Pankaj Mathpal adds.
Earlier term plans were more expensive than HLPP. "However, with the advent of online term insurance plans, a home loan borrower may end up buying a term plan cheaper than HLPP," says Suresh Sadagopan.
A 35 year old male, will pay an annual premium of Rs 4850 for a 50 lakh cover for 20 years. "The biggest advantage of a term plan is the life cover remains constant in a term plan over a period of time whereas in HLPP it keeps declining," says Karthik Jhaveri, certified financial planner, Transcend India.
Under a HLPP, the principal amount which is over Rs 1.72 lakh is parked with the insurer. ""If you stick to a conventional term plan since your early years, you will benefit from lower premiums.
You can actually park the money you save in high-growth instruments such as equity-linked savings schemes (ELSS) initially, which also provide similar tax breaks instead of locking in at higher premium," says Suresh Sadagopan.