When taking a long-term loan like a home loan, it's smart to plan how to reduce risks. Even though your property serves as collateral, removing the need for extra insurance, there's still some risk involved, especially considering the possibility of your passing away before paying off the loan.
But, in the scenario mentioned, you still have to pay the home loan equated monthly instalments (EMIs). If you can't, the bank can take your property. A term insurance policy is a safety net to safeguard your family financially if you pass away during the home loan. If the main earner dies, the insurance can cover the remaining home loan, easing the burden on your family.
Deciding the right life insurance amount to buy relies on your unique financial situation, objectives, and requirements.
According to experts, home loan insurance offers an added layer of protection, ensuring the loan is covered if the borrower passes away during the loan period. On the other hand, a term policy can provide cost-effective insurance against all liabilities, including home loans, preparing families for various financial challenges. Remember that low-term coverage may only cover loan dues, leaving nothing for your family. To prevent this, consider obtaining additional term coverage.
"While the lender doesn't mandate insurance, as the home loan is secured, the insurance provides peace of mind that your family won't bear the burden of repaying the loan if something happens. Choose the option that offers maximum protection and coverage, considering you're purchasing insurance to safeguard your family's interests. Evaluate your liabilities and decide based on the coverage you need and the premium," says Adhil Shetty, CEO of BankBazaar.com, a financial services website.
Deciding the right amount of life insurance depends on your unique financial situation, goals, and needs. There is no universal answer, as the required coverage varies individually. "Typically, the claim amount should replace your income for the next five-10 years and cover outstanding debts like car loans, home loans, personal loans, etc. The life insurance policy should ideally assist your spouse or beneficiaries in achieving future financial goals like education, retirement, etc., in your absence. It's advisable to seek guidance from a financial advisor or insurance professional for a thorough needs analysis tailored to your specific circumstances," says Shetty.
Moreover, you can allocate the proceeds from your term insurance towards a home loan. Term insurance proceeds can be assigned to a home loan, meaning that in the event of the policyholder's death, the benefits from the term life insurance policy are used to fully or partially repay the home loan. The assignee, in this scenario, becomes the policy's beneficiary and holds the primary claim to the proceeds. The death benefit is then directed to the lender, who utilizes it to settle the outstanding mortgage.
If the anticipated insurance proceeds exceed the loan amount, you can choose a partial assignment. In this case, only the specified amount is given to the assignee, while the remaining proceeds are disbursed to the nominee.
It's recommended that the coverage amount (sum assured) match the outstanding balance of your home loan. This ensures that the insurance payout can fully clear the remaining home loan in the unfortunate event of your passing, leaving your family with a debt-free property. Equally important is aligning the term of your insurance policy with the tenure of your home loan. For instance, if your home loan spans 20 years, your insurance policy should also have a 20-year term.
Consider a decreasing term insurance policy for home loan protection. Experts suggest opting for decreasing life cover insurance, where the sum assured decreases by a fixed percentage each year. This can be a cost-effective choice to secure your family's financial well-being. If both spouses are co-borrowers on the home loan, having joint coverage on both lives is advisable. This ensures the insurance payout can cover the entire loan if either spouse dies. However, experts note that there's no automatic attachment of a life insurance policy to a home loan; the nominee must handle the home loan prepayment from the proceeds.
The assurance that your family won't bear the burden of the home loan in case of an unfortunate event can bring you peace of mind, guaranteeing that your loved ones can reside in the house without worrying about mortgage payments.