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Protect Your Family From Liability Of Home Loan

IndianMoney.com Research Team | Posted On Monday, August 20,2018, 06:16 PM

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Protect Your Family From Liability Of Home Loan

 

 

 

Home Loan is a life-long commitment. Banks usually grant home loans only if you have a steady flow of income. What if something were to happen to you? What if you die or are disabled in an accident while there is still a huge chunk of home loan outstanding to be repaid?

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Protect Your Family From Liability Of Home Loan

In case of a joint home loan, the co-applicant could take care of the loan. What if you are a single borrower and your spouse doesn’t earn? Then, the burden of home loan repayment falls on surviving family members. If the home loan is not repaid, the bank may seize your house.  All home loan EMIs paid would be wasted, and your family will not have a roof over their heads. Therefore, it is important to protect your family from a Home Loan liability. How can you do this?

How to protect your family from home loan liability?

 

There are two options by which you can protect your family from home loan liability:

 

  1. Term Life Insurance
  2. Home Loan Protection Plans

 

In this article, we have evaluated both the options.

 

1. Term Life Insurance:

 

Term life insurance plans pay a beneficial nominee (spouse or children or parents) the sum assured, in case the policyholder dies within the policy term. A sufficient sum assured in a term life insurance plan would pay outstanding loans, fund financial goals and provide for family’s regular expenses in your absence. Therefore, it is important to avail a term life insurance policy to cover the Home Loan.

It’s ideal to avail a term insurance plan:

  • With the same sum assured as the Home Loan amount and
  • Same term as home loan tenure

 

2. Home Loan Protection Plans (HLPP):

 

The bank/lender may insist that you avail a Home Loan Protection Plan (HLPP). Banks may insist that HLPP is compulsory to avail the Home Loan. The purchase of any insurance to cover a home loan is not mandatory by law. Some banks may have internal policies mandating the purchase of insurance to cover home loans.

 

What is HLPP? Should you go for it?

 

HLPP is an insurance plan that covers the outstanding Home Loan amounts, if the borrower dies within loan tenure. The insurer settles the outstanding loan amount. The excess amount after paying off the home loan is given to the beneficiary.

 

SEE ALSO: Why Is There No Insurance For Mental Illnesses In India?

 

Premium Payment:

 

HLPPs are mostly single premium policies. The premium amount is clubbed with the loan amount. The bank pays the premium to the insurer on behalf of the borrower. A single premium home loan protection policy doesn’t enjoy any tax benefits under Section 80C. However, a few HLPPs provide separate premium receipts for 5 years so you can claim a tax deduction.

HLPPs also have two other variants, regular premium and limited premium payment terms. The term of premium payment in Regular Premium Plans is the same as the policy tenure. Whereas, the term of premium payment is less than the policy term in case of Limited Premium Payment Plans.

 

Things to keep in mind:

 

  • HLPPs are expensive.
  • In case of pre-closure of home loan or transfer to another bank, you may lose entire or part of the premium.
  • Option to avail riders such as critical illness or disability rider. The premium will increase accordingly.
  • In case of a joint home loan, a single HLPP is enough to cover all co-borrowers. So, there is no need to avail separate term insurance plans for each borrower.
  • Your life cover will continue only till the end of the policy period.

 

SEE ALSO: Health Insurance Plans To Cover Mental Illness Too, But Will That Help?

 

Term Insurance Plan v/s HLPP:

 

Term insurance plan is better than HLPP because:

  • Term insurance plan is cheaper than HLPP.
  • In a HLPP, cover keeps decreasing with each EMI payment you make. Whereas, life cover in a Term Insurance Plan doesn’t change.
  • Term Plan cover continues even if you shift the home loan to another lender. In case of HLPP, you will have to forgo premiums already paid.
  • The lender will recover the commission paid on HLPP from you.

 

What if banks insist on purchase of HLPP?

 

  • Ask the bank to give this in writing and challenge them stating you are aware of the rules and it’s not compulsory.
  • Ask the bank to show the relevant clause in the loan agreement mentioning compulsory purchase of HLPP along with the Home Loan.
  • Escalate the issue to the Senior Management; drop an e-mail to the MD or CEO of the bank.

 

Avoid availing a HLPP. The best thing to do is to compare premiums of different term insurance plans online and decide which one is best and affordable.

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