Should you opt for mortgage loan insurance or a fixed-term contract?

The real estate market is seeing a rebound in demand after two years of the covid pandemic, with many consumers now looking to buy their dream home. Some are even looking for larger homes to accommodate a work-from-home routine. Are you one of those who want to buy a house and if so, will you opt for a mortgage? In the case of the latter, the next question that needs to be addressed is: are you going to take out home loan insurance or a term loan to protect you from any unforeseen financial liability.

Note that if you were to buy a house with a home loan, you would need to cover the liability with insurance equivalent to the amount of the loan. This liability can also be covered by a term loan. However, what you need to know is whether the benefits of a term loan outweigh those of home loan insurance.

Experts say that if your liability only extends to your home loan, you may want to consider buying home loan insurance because the sum insured decreases as the outstanding amount of the loan decreases.

However, a term plan provides protection against broader debts, including home equity and other types of loans and debts.

“Home loan insurance is similar to life or term insurance. The only difference is that the amount of home loan coverage continues to decrease as the term of the loan progresses,” says Sajja Praveen Chowdary, Associate Director, Policybazaar.com.

“For example, suppose you take a 1 crore ready today with a 1 crore home loan insurance. With this, your life is covered (via home loan insurance) for 1 crore, but this amount keeps decreasing every year as you pay the equivalent monthly installments (EMI) to the bank. In the event of the death of the policyholder, the insurance company pays the sum insured for that year to the bank. If it is greater than the outstanding amount of the loan, the candidate obtains the remaining amount; if it is lower, the nominee must pay the remaining amount to the bank,” he explained.

For example, if the insured fails to pay an equivalent monthly installment (EMI) in between, the outstanding loan amount will increase. Then, the home insurance contract may not cover the entire outstanding amount. In addition, the applicant will have to bear these additional costs if any misfortune occurs to the insured during this particular period of insurance.

Tax advantage: “If you have taken out a housing loan and a life insurance contract (housing loan insurance contract) to cover the repayment of the housing loan, in the event of unforeseen events in the future, you can benefit from a Section 80C tax deduction on premium paid for home loan insurance, provided it is a life insurance policy (subject to other conditions such as premium not exceeding 10% of the sum insured) and not a general insurance policy covering risks such as fire, earthquake, flood, loss of employment, etc. said Amarpal S. Chadha, Tax Partner and Head of India Mobility, EY.

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You should check your liabilities before choosing between home loan insurance and term insurance. A term plan is full coverage that provides a fixed death benefit that you can use for any need. However, home loan insurance only covers the outstanding loan amount. Therefore, when you repay the loan during the term of the policy, the sum insured will decrease until it is zero.

Point to note:

Home insurance differs from mortgage insurance because the former covers the structure of your building, the property inside your home, or both, depending on the policy. Typically, it protects your home and property from damage or loss due to natural disasters, theft, etc. With mortgage loan insurance, the amount of the guarantee is linked to the amount of the loan. You will get the sum assured to the extent of the loan amount.

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