Owning a home is a goal that many people aspire for. They secure this dream with their life savings and often pledge a portion of their future income towards it by availing a home loan. However, in case of an untimely eventuality, if the borrower is no longer able to repay the loan, this dream can get shattered before you know it.
What are the situations when housing investment comes under risk?
The future is always unpredictable. Two factors can trigger non-repayment of home loans:
- The borrower’s sudden demise
- The inability of the borrower to continue earning due to a critical illness, accident or loss of revenue
In either case, the burden of repaying the loan falls on the borrower’s family members. If the loan cannot be repaid, the lender can also legally take over the property as a stressed asset.
How can a term insurance plan cover risks?
When you are taking a home loan, you can buy a term insuranceplan of an amount equal to the sum of the home loan. This enables you to ensure that your loved ones are not weighed down with a debt they cannot afford in case of any unforeseen contingencies.
Many a time, the lending institution may also insist that the borrower get term insuranceat the time of sanctioning the loan. They do this to ensure that the loan is repaid in time. It is not compulsory to buy coverage with a home loan, but getting a term plan along with a loan can give you peace of mind and secure your family’s future. Term insuranceoffers a large sum assured for a comparatively smaller premium, and your dependants can utilize it to repay the loan under unforeseen circumstances.
The benefit of term insurance over home loan insurance
You can choose a separate home insurance plan to cover the outstanding amount if you fail to repay the debt. However, most of these insurance plans provide reducing coverage; that is, the amount that is covered is linked with the outstanding amount on the home loan. As you pay the equated monthly instalments (EMIs) on your home loan, the amount insured also decreases.
In the case of a term insurance plan, the coverage remains unchanged, and there is no death benefit with a term plan. Nevertheless, the nominee receives the full sum assured and can use it to settle the remaining amount of the loan and retain the rest for other necessities. In most cases, the lender presents the offer to add the premium for the term insurance to the loan amount, especially in case of single premium term insurance. This can slightly increase the EMI amount but not to a sizeable extent.
Tax benefits of a term loan
You can avail income tax benefits under Section 80C of the Income Tax Act for the premium you pay towards your term plan. Also, the sum assured paid to the nominee as the death benefit is tax-exempt under Section 10(10D) of the Act.
Riders to onsider maximizing the benefit of a term plan
It is advisable to find out about add-on covers and riders when you buy a term plan. It is advantageous to obtain a policy that covers adversities like disability, critical illness, accidental demise, as well as natural death, and unemployment.
Buying term insurance coverage for a home loan will hedge the unnecessary risk on your home. Term plans,bought against a home loan, protect your family from a financial crisis and keep the roof over their heads intact even if you are not able to stand beside them for various reasons. In order to avail long-term benefits, it is advisable toopt for a cover that extends up to the complete tenure of the home loan.