Have a home loan? Take a term insurance policy to guarantee peace of mind

• A term insurance policy provides a financial safety net for your family in case of your untimely demise during the tenure of the home loan.
• It is crucial to match the insurance policy's term with your home loan tenure.
• Consider opting for a decreasing term insurance policy for home loan protection with decreasing coverage amounts over time, aligning with your declining loan balance.
  

Liability and risk is a marriage made in heaven. Any individual who is looking to take on a loan needs to factor in ways to mitigate the risks that come with it. For instance, a home loan is a long term commitment since the tenure is of 15 years or more. One would ideally want to pay off the loan before retirement so that one is free from liabilities.

However, one needs to prepare for the unfortunate eventuality of one’s demise during the tenure of the loan. The lender doesn't require you to purchase insurance. Since the home loan is secured, your property serves as collateral for the loan, eliminating the need for additional insurance. This does not mean that there is no risk.

A term insurance policy can provide a safety net

However, in the situation mentioned above, the home loan EMI still needs to be paid. The failure to do so would mean that the bank will have access to your property. A term insurance policy provides a financial safety net for your family in case of your untimely demise during the tenure of the home loan. “If the primary breadwinner passes away, the insurance can help cover the outstanding home loan amount, ensuring that your family doesn't face the burden of repaying the loan,” says Atul Monga, CEO and co-founder, Basic Home Loan.

You can take a fresh policy or include it in your life insurance coverage

Determining the appropriate amount of life insurance to purchase depends on your individual financial circumstances, goals, and needs. “There isn't a one-size-fits-all answer, as the amount of life insurance required varies from person to person. Typically, your claim should replace your income for the next 5-10 years. The benefit should also be enough to pay off your outstanding debts, such as car loans, home loans, personal loans, etc,” says Adhil Shetty, founder and CEO, BankBazaar.com, a financial services marketplace. The life insurance policy should also ideally help your spouse or beneficiaries achieve future financial goals such as education, retirement, etc., in your absence.

It is important to either include the home loan outstanding when buying life insurance, or if you have taken a home loan later, it is recommended that you take an additional cover.

“It is best to consult with a financial advisor or insurance professional who can perform a detailed needs analysis based on your specific circumstances,” says Shetty.

What to keep in mind

It's advisable to align the coverage amount (sum assured) with your home loan's outstanding balance. This ensures that if you were to tragically pass away, the insurance payout can completely clear the remaining home loan, leaving your family with a debt-free property. Additionally, it's crucial to match the insurance policy's term with your home loan tenure. For instance, if your home loan spans 20 years, your insurance policy should also have a 20-year term.

Consider opting for a decreasing term insurance policy for home loan protection. There are decreasing life cover insurances, where the sum assured decreases by a fixed percentage every year,” says Rhishabh Garg, head, term Insurance, Policybazaar.com, an insurance portal. This can be a cost-effective choice to ensure your family's financial security.

“If both spouses are co-borrowers of the home loan, it's a good idea to have joint coverage on both lives. This ensures that the insurance payout can cover the entire loan if either spouse passes away,” says Monga.

However, Garg says that there is no way to auto attach a life insurance policy to a home loan. The nominee will have to take care of the home loan prepayment in an eventuality from the proceeds.

Having the assurance that your family won't bear the home loan burden in case of an unfortunate event can provide you with peace of mind. It guarantees that your dear ones can reside in the house without the concern of mortgage payments.