HLPP or Term Plan

Owning a home is a fundamental need, and for many, a home loan is a necessity in today's world. A home provides shelter, safety, and security.

However, with property prices constantly rising, fulfilling this basic need can be challenging. A home loan offers a solution, but life is full of uncertainties. This is why many lenders offer Home Loan Protection Plans (HLPPs) to help individuals or their families repay the loan in case of unexpected events.

Many believe that term insurance plans offer similar protection. Let's delve into the details to understand the nuances of both plans.

What is HLPP?

An HLPP is a risk-mitigating tool that covers the outstanding home loan amount if the homeowner passes away unexpectedly. This plan protects the borrower's family from the burden of repaying the remaining loan. The risk cover is equal to the outstanding loan amount and reduces as the loan decreases, following the reducing balance principle.

What is a Term Plan?

A term plan is a life insurance product that provides financial coverage to the insured for a specific period without any profit component. It offers financial compensation to the insured's family in case of their unexpected demise. These plans are basic, affordable, and allow policyholders to secure a larger cover at a lower premium.

Comparing HLPP & Term Plan

Initially, both plans appear similar, aiming to provide financial cover. A commonality between them is the absence of maturity benefits; if the insured survives the policy term, no benefits are paid out. However, several key points should be considered when choosing between these plans.

1. Type of Cover

   As the name suggests, an HLPP specifically covers your home loan. If the insured dies, the payout can only be used to clear the outstanding loan amount. In contrast, with a term plan, the death benefit can be used by the family for any purpose and is not restricted to the insured's liabilities. HLPPs also lack portability, meaning the plan cannot be switched to another lender.

2. Premium

   Most HLPPs require a one-time premium payment, whereas term plans typically involve scheduled, smaller premium payments. Consequently, HLPP premiums are generally higher than term plan premiums, making term plans more affordable.

   Another advantage of term insurance is the flexibility to modify the cover and premium during the policy term. However, since the HLPP premium is paid upfront, the cover cannot be modified. If an individual extends their home loan tenure, the HLPP policy tenure remains the same, leaving the extended loan period exposed to risks. Furthermore, if the individual decides to foreclose the HLPP, the one-time premium amount will not be refunded.

3. Life Cover

   A term plan provides life cover to the insured and their family, regardless of the number of liabilities. If the insured dies, the family is eligible to receive the sum assured, which can then be used to clear all liabilities and meet their family's needs. An HLPP, however, is directly tied to the sanctioned home loan amount and changes as the loan amount fluctuates. If the insured pays off the loan, or the amount reduces over time, the risk cover decreases and becomes zero once the loan is fully paid. Therefore, families seeking comprehensive life cover often prefer term plans.

4. Add-on Benefits

   Both term plans and HLPPs offer add-on benefits covering terminal illnesses, unemployment, disabilities, and specific diseases like cancer or cardiac issues. HLPPs also provide cover for the first 3-6 months of home loan EMI payments, which can be appealing to home loan buyers. However, the cost of adding these covers varies, necessitating a careful comparison before opting for them.

Conclusion

HLPPs are often preferred by lenders as they secure the disbursed loan amount. For this reason, most lenders encourage customers to opt for HLPPs, even though they are not compulsory. An HLPP significantly reduces the lender's chances of incurring bad debts. When applying for home loans, lenders assess an individual's creditworthiness, and choosing an HLPP can often increase the chances of loan sanction or approval.

However, for borrowers, a term plan is generally more suitable, as it secures all their liabilities and family needs. If an individual already has an adequate term plan that also offers tax benefits, an additional HLPP might not be necessary. However, if the existing term plan is insufficient and the insured wishes to protect their family from a major financial risk, then an HLPP could be beneficial. It is important to remember that a person's term insurance cover should ideally be 10 times their current income. Based on this guideline, every individual should assess their need for additional insurance cover.