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Securing a home loan liability: Home loan insurance or term policy?

The main difference is that home loan insurance covers property, while a term policy covers a person’s life

April 27, 2022 / 07:27 AM IST

So your home loan has finally been disbursed and you can now proudly call yourself a homeowner. This is indeed one of the most cherished and expensive investments you’ll make in your life.

But have you ever thought of the possibility of something happening to you before you pay your full home loan? Your liabilities will be handed over to your family members, leaving them under financial stress.

While there are various things to consider before investing in a house, we often neglect important add-ons such as an insurance policy that covers your home loan repayments. There are two ways to prevent your family from the burden of such liabilities – home loan insurance or a term insurance policy.

Both policies provide cover against financial stress. The main difference between them is that a home loan covers the property, while a term policy covers a person’s life. Let’s dig deeper to understand the differences.

Premium charges

Depending on needs and the current financing status, one can choose either type of cover. Term insurance allows the policyholder to pay a monthly or annual premium, which makes it less expensive. However, an extended period of inflation could significantly reduce its value.

Comparatively, home loan insurance is added to the home loan, which makes it more expensive. At the same time, it protects homeowners during the loan term, providing the benefit of owning property at a much lower cost.

Policy cover

Term insurance is a type of insurance that covers the life of a person for a specific period or term – from one month to 30 years. But it is important to note that it only covers the risk of death during the term period.

Home loan insurance protects the lender against a default by the borrower due to unemployment, disability or death. When the outstanding home loan is repaid, the coverage ends. However, if the borrower dies within the tenure, the policy pays the outstanding home loan balance.

Tax benefits

A person who takes a home loan already saves tax and is offered deductions under Section 80C of the Income Tax Act. Since home loan insurance is added to the home loan, it offers the same benefits.

Term insurance holders also get deductions under Section 80C. Comparing the two based on tax benefits doesn’t show much difference. However, the benefits may differ depending on the loan duration.

Rider benefits

One of the biggest benefits of home loan insurance is that it comes with add-ons such as coverage for unemployment, disability and chronic illnesses.

However, on paying additional premium, term plans also offer similar cover. However, because there is a rise in cost by adding the riders, one should weigh the options and do a fair comparison according to your needs.

Which to opt for?

If you think you might need the money from the life cover, then term coverage may be the best. If it is more likely that your home will need to be sold to repay your debt, then a home loan insurance plan may work better.

A home loan insurance policy takes care of a large section of life’s finances. So it is best suited for those repaying the amount through monthly instalments. One can also repay an EMI with tax deductions by opting for this product as it has been approved by the income tax department as revenue expenditure.

Atul Monga is Co-founder & CEO, Basic Home Loan
first published: Apr 27, 2022 07:27 am