Home Loan Protection Plan Vs Life Insurance Cover – Which should you choose to protect your home loan?

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April 06, 2021 3:15 PM

While opting for a home loan, a protection plan is a necessity, so that in case of any unexpected event, the individual or his/her family has the financial support to repay the loan.

It is structural in nature and unlikely to dissipate soon, Housing Development Finance Corporation (HDFC) chairman Deepak Parekh said on Thursday.It is structural in nature and unlikely to dissipate soon, Housing Development Finance Corporation (HDFC) chairman Deepak Parekh said on Thursday.

While opting for a home loan, a protection plan is always suggested and is a necessity, so that in case of any unexpected event, the individual or his/her family has the financial support to repay the loan.

Having said so, a life insurance pure term plan also offers the same protection and more. Hence, people usually get confused while looking for a protection plan for their home loan. Usually, home loans are big-ticket size loans ranging from Rs 30-Rs 70 lakh on average, due to which a financial protection plan is necessary.

A home loan protection plan is a risk-mitigating tool, which covers the outstanding home loan amount on behalf of the borrower/owner of the house, if he/she passes away unexpectedly. The family members of the borrowers, in this case, get protected with the plan, and the burden of paying the remaining loan amount does not fall under them. Usually, home loan protection plans come with a reducing balance principle, wherein the risk cover is equal to the outstanding loan amount of the borrower and reduces as the loan reduces.

Term insurance plans, on the other hand, acts as a financial protection plan for the dependents of the policyholder. These life insurance plans help the dependents of the policyholder tackle any financial crisis that might arise. These life insurance products provide financial coverage to the insured for a specific term selected by him/her, without any profit component. Experts say as term plans are basic and affordable, for a lower premium a policyholder can take a larger cover. With term plans, the benefit of the policy is received by the nominee, in case of the unfortunate death of the policyholder.

Even though under different categories, one score over the other – it is seen that usually, lenders suggest the home loan protection plan as it keeps the disbursed amount secured. Experts say lenders push home loan protection plans as it reduces the chances of incurring bad debts for them even though it is not a compulsory option. Additionally, before approving a loan, loan providers assess the creditworthiness of every individual, and opting for a home loan protection plan increases the chances of loan approval. Hence, most borrowers blindly, opt for the home loan protection plan.

Having said so, the most suitable option might vary from the most popular option. Industry experts say, even though the home loan protection plan is most popular among home loan borrowers, a term plan could be more suitable. The financial protection of a term plan is not limited to a home loan. It keeps all the borrower’s liabilities and needs of the family secured, in absence of the policyholder. Also, the benefits of a term plan do not reduce with the reduction in the home loan amount.

However, a borrower might then need to opt for a home protection plan, if he/she does not have adequate existing term cover. In that case, to protect the family from major financial risks, experts say, it is beneficial to go for a home loan protection plan. It is advised by financial planners, that the adequate term insurance cover of a person should be 10 times his/her current income. Based on this, one could decide if adding another insurance cover or home loan protection plan is needed, with a home loan.

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