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Cover your home loan

Worried about how your dependants will repay the massive home loan you have taken if something happens to you? Here's what to do.

By Narayan Krishnamurthy | Print Edition: November 16, 2006

You have just signed on the dotted line for that lavish Rs 75 lakh condominium. The EMI for the Rs 60 lakh home loan you took certainly puts pressure on your finances but you are confident that you will be able to service it. You are expecting a fatter pay cheque next year. And your investments are doing exceedingly well. But what if something untoward happens to you? An accident, a sudden illness, anything … Don’t spend sleepless nights worrying about how your family will repay that seven-figure home loan if something were to happen to you.

Instead, call your insurance agent and find out how you can cover your loan with an insurance cover. The best option would be to go in for term cover for a sum equivalent to the housing loan.

For 45-year-old Mumbai-based software professional Ajit Welling, his second home loan is less worrisome than the first. Welling has not left anything to chance and secured his home loan this time. “I wouldn’t want my family to bear the burden of repaying my home loan in case I’m not around,” he says pragmatically. This is why he has signed on for a declining liability home loan insurance cover from SBI Life Insurance for the Rs 11 lakh loan he took to buy a flat in Thane.

LESS FOR MORE

Age253035
Pure term policy premium5,1905,5906,170
Total premium paid (15 yrs)77,85083,85092,550
Loan cover policy premium7,5708,6309,570
Total premium paid (10 yrs)75,70086,30095,700
Loan cover term assurance policies are designed to give the borrower a life cover equivalent to their home loan. As the payment of EMIs progressively brings down the outstanding loan over the years, the insurance cover also reduces. The insurance plan ends when the loan term is complete. Five insurance companies—MetLife Insurance, HDFC Standard Life Insurance, SBI Life Insurance, Reliance Life Insurance and Bajaj Allianz Life Insurance—are offering loan cover term insurance policies.

Says Pier Paolo Dipaolo, deputy CEO of SBI Life Insurance: “If a person’s existing insurance policies and other financial assets are not sufficient to cushion the impact of an unforeseen event, one should definitely give serious thought to a loan cover term assurance policy.” Few home loan customers, however, realise the importance of taking mortgage protection. Says Kolkata-based financial planner Brijesh Dalmia: “Many people who had overleveraged themselves are already facing the burden of increasing housing loan interest rates. It’s important to realise that the liability that they carry may be a load that could drag down their dependants.” Says Rajesh Relan, managing director, Metlife India: “With such plans, the objective is to introduce customised risk protection at an affordable price; they offer value and are convenient the way they are structured.” Convenient, yes. Useful, yes.

Cheap, no. Loan cover term assurance is not such a great idea when you compare the policy features with those of an ordinary term policy. While the total interest outgo for a Rs 20 lakh cover for 15 years is almost equal in both cases (see table Less for More), the plain term policy is a better option because its cover does not diminish. In a loan cover policy, the sum assured diminishes over time (see table Better Terms). In the fifth year, the Rs 20 lakh cover will reduce to Rs 16 lakh. In another five years, another Rs 6 lakh is shaved off. By the fifteenth year, the cover would have shrunk to Rs 20,000.

On the other hand, the level of the life cover does not diminish in case of a plain term insurance policy. That way, if something happened to the borrower, the amount received from the insurance firm would be split between the home loan provider and the beneficiaries. There’s another way of going about this. The borrower can take multiple term policies of varying tenures and sums to approximately match the diminishing loan liability (See table Breaking It Down). “Such a method kills the very structure of such customised products.

The objective is to introduce customised risk protection at an affordable price,” says Dipaolo. Considering the frenzied activity on the home loan front in the past few years, lenders are keen to protect their financial interests have been hardselling the merits of liability cover, offering it as a bundled product along with the loan; and this product has evolved rather dramatically in recent times. In fact the bundling is making many lenders even enhance the home loan amount by adding the single premium to it.

Going by the need to take additional insurance only to the extent of the extra risk one carries on the big home loan, whatever the risk you face, there’s a cover out there that’s customised for you. Which is why Welling’s mind is uncluttered by concerns for his financial dependants; as he leans over his chair for his next shot, he is all set to give his best shot at life.

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