When you are about to close the deal with your banker to avail a home loan, you could be asked by the lender to purchase a life insurance policy. However, remember that buying a life insurance policy is not compulsory along with a home loan. Even though it’s better to have an insurance policy to cover a liability of the nature of a home loan, it is not mandated by any authority to get the coverage. The insurance policy offered by lenders is the term insurance plan that comes with low premium and high coverage.
As a home loan borrower, it is entirely your discretion to buy the insurance policy and it cannot be forced upon the borrower. While getting a home loan, the lender typically offers a single premium insurance plan and to make it an attractive deal, adds the amount of single premium to the loan amount. Your EMI gets increased slightly and many borrowers may accept the offer. Essentially, you get a home loan and on top of it get insured too.
Insuring your home loan with an insurance plan is a must. As the home loan amount is typically in several lakhs, it is essential to get a cover so that the liability of repaying it does not fall upon the family members in the case of death of the borrower.
In addition to the insurance policy being offered by the lender, you have two more options – either buy a term insurance plan from any other insurance company on your own, or buy the mortgage insurance plan specifically designed to address the need of insurance coverage of home loans.
If you already have a term insurance plan, you may consider buying a new one for an amount equal to the home loan. Most financial planners suggest keeping a coverage of at least 15 times of your take-home pay. Hence, look at the existing coverage that you have and the amount you would need after getting a home loan. Make sure your life goals and financial liabilities are adequately covered preferably through a term insurance plan.
Alternatively, you may consider buying the mortgage insurance plan. In such a plan, as the loan outstanding amount keeps decreasing over time, the coverage too falls. So, even if you have taken a loan of Rs 40 lakh, and if the loan outstanding after 9 years is Rs 14 lakh, the coverage in the mortgage insurance plan will also be equal to Rs 14 lakh.
These plan suits suit those who are already adequately insured via a term insurance plan. Also, most borrowers prepay home loan much before its original tenure, hence, mortgage insurance plans may suit them. Before finalizing, check the premium for both the options based on your age, term and amount.