Why the Term Plan Works Better for Home Loan Liability

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The biggest financial liability an individual can take on is a home loan. Failure to repay the home loan means that the lender could acquire the house, which had been mortgaged as collateral. In order to avoid such a situation, borrowers ensure that all their repayments are made on time. However, in the event of unforeseen circumstances that may interfere with your repayment schedule, you have some choices.

One such option is life insurance coverage to protect borrowers against the risk of their family losing their home. Two types of life insurance cover can be taken out to protect against the risk of premature death of the borrower. The first option is a traditional term plan. In the event of death, the life insurer pays the insured amount to the family, which can be used to repay the loan.

In the case of the term coverage option, there is no connection between the lender and the insurer. The borrower is responsible for obtaining the term insurance policy himself. He/she may need to pass medical tests and other underwriting requirements.

The second option available to the borrower is to purchase a Home Loan Protection Plan (HLPP) or reduced term mortgage insurance through the lender. In this case, the lender purchases a group policy to cover all of their home loan customers. The plan’s insured amount decreases as the outstanding principal decreases (or the loan is repaid).

Indraneel Chatterjee, co-founder of RenewBuy, told Rediff that HLPP covers the outstanding amount of an individual’s home loan in the event of accidental death, serious illness or disability. He further added that the family’s house or collateral will not be seized by the lender to recover the loan amount. He went on to say that it is the obligation of the mortgage insurance provider to pay the outstanding amount to the lender.

Buying HLPP is easy. Usually, no compulsory medical examination is required. The borrower only has to sign a declaration of good health.

Deepesh Raghaw, founder of Personal Finance Plan and registered investment adviser with the Securities and Exchange Board of India, told Rediff, said HLPP is quite an expensive hedge. He went on to say that banks sell this product because they get a high commission on it.

A separate term life insurance policy works best in most cases. It’s less complicated to compare term insurance premium costs from different insurers and buy what’s right for your pocket.

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