Owning a home, a place that is truly yours is undoubtedly one of the biggest financial achievements in one’s life. However, it is not an easy task as you need to consider multiple things, including your finances before making such a big transaction of your life.
Despite having easy availability of home loans in various banks and non-banking financial institutions, the choice for the right home loan is quite critical. Repayments of home loans often take several years, sometimes decades too. So, the borrower needs to be precise about every single detail like interest rates, loan tenure, add-on products, and insurance of home loan.
Yes, you read it right. Your home loan needs to be insured to cover the loan amount in case of any misfortune or life-threatening events. Upon taking a loan for your home, it becomes your liability, and in case of your death or inability to pay the loan amount, this liability falls on the shoulders of your family members. So, the insurance coverage of your loan amount saves your family members from the financial burden of the home loan. The two most common options to insure your home loan are – Home loan protection plan (HLPP) or Term insurance. However, here the question is - Which is the best option for you? So, let’s dive deep into both the insurance products to help you in selecting the right one.
Home Loan Protection Plan (HLPP) and Term Insurance
On opting for the home loan protection plan, your insurance company will pay the outstanding loan amount to the lender (on your behalf) under certain conditions like your sudden demise and loss of job due to partial or full disability.
HLPP is a single premium insurance product. Its policy term is usually the same as the loan duration, and it offers the sum assured equal to the loan amount. It follows the reducing coverage concept wherein the sum assured keeps on reducing as per the deduction in loan amount upon repayment by the borrower.
On the other hand, the term insurance offers financial protection to the family even when you are not with them. Unlike HLPP, the amount offered to the beneficiary can be used by the nominee for any financial purpose (not just to pay the home loan).
Is Home Insurance and Home Loan Protection Plans The Same Thing?
Often people misunderstand the home loan protection plan as the home insurance plan. The former offers cover for your home loan whereas the latter covers the potential loss to your home and its belongings due to natural calamities and man-made events.
HLPP or Term Plan - which is best when you have a home loan?
HLPP is not a mandatory requirement for a home loan. In fact, experts say that if you already have term insurance, then you don’t need to buy HLPP.
However, what if your term coverage is quite low or insufficient to pay your loan dues in case of mishappenings? So before selecting an option, take a look at the below factors comparing the HLPP and term insurance.
HLPP is a single premium insurance product while term insurance can be purchased with monthly, quarterly, half-yearly, annually, or single premium (as per the wish of the policyholder). Moreover, the amount of premium is higher in HLPP than term insurance because being a single premium product, it is clubbed with the loan amount, thus increasing your EMI proportionately. For instance, if your loan amount is 10 lakhs and its premium is 1 lakh, then your outstanding loan amount becomes 11 lakhs, and you need to pay EMI for 11 lakhs.
The home loan protection plan only offers insurance coverage for your home loan. It means that if you pay off your home loan before completing policy/loan tenure, then your HLPP will become null. On the other hand, if you purchase term insurance to cover the loan amount, then it offers insurance coverage as long as you pay premiums (even if you paid off your loan amount).
Moreover, in case of your demise, the insurance coverage against HLPP is limited to your loan amount only; you can’t use that for any other financial need. Whereas, in term insurance, the insurer will pay a lump sum amount as a death benefit to your nominee who in turn can use that amount for any financial purpose including, paying off the outstanding loan amount.
In case you are changing your lender (bank) of your home loan, your HLPP cannot be transferred even after the porting of your home loan. Similarly, if you are changing your home loan tenure, then the span of HLPP will remain unmodified. So, HLPP offers no flexibility. Whereas in term insurance, you are free to change your cover (based on your financial needs).
Accountability For Suicide Or Death Due To Natural Cause
If you have purchased HLPP, then it does not offer your family coverage against your death due to natural cause or suicide. Whereas, after completing the first year of term insurance, the cover for both gets included in the plan.
What you can do?
Though owning a house is one of the biggest achievements; however, with a home loan, it is a long-term commitment. Having insurance coverage for your home loan allows your dear ones to live in your home without any burden of paying off home loan premiums (if you die before repaying the complete amount).
If you are planning to purchase an insurance cover for your home loan, then term insurance is better than a Home loan protection plan. HLPP favors lenders, not borrowers. In case you already have purchased a term insurance plan, then refinance your coverage according to your home loan. Remember, one should buy a term cover of at least ten times one’s annual income.
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