With house prices soaring, it is almost impossible for a person to own a house without taking out a large amount of home loan. In this article, I want to explain why you should buy a separate life insurance policy to cover mortgage liability and how to go about it.
Since the mortgage loan amount used to buy a house is such a large part of a household’s monthly income and God forbid something happens to the family’s livelihood, it becomes almost impossible for the family to manage the household. household without servicing the house loan in such a situation.
As a basic principle of financial planning, you should take out life insurance to cover all of your financial liabilities. When you take out a home loan you are creating a new financial liability and taking out a life insurance policy to cover the home loan liability will ensure that the legal heirs inherit the house and not the home loan liability. This will help the family avoid the double pain of losing the breadwinner’s regular income and having to leave home, in the event that enough money is not available to pay off the outstanding home loan.
Let me clarify that the life insurance policy I suggested is in addition to the usual life insurance coverage you may already have, to protect your family members in case something goes wrong. would happen to you.
How to do it
The basic advice that a financial planner gives is to purchase life insurance through a term plan only and not to go with any other insurance product. This advice also applies here too. If you are tech-savvy and can transact online, I would advise you to buy a term plan online which is cheaper than regular term plans with no product difference. The term of the life insurance policy to be purchased for this purpose must equal the term of the mortgage.
Lenders typically require single premium policies that are tailor-made for home loans, where the insurance premium amount is included in the home loan and is recouped over the life of the home loan through enhanced IMEs. However, I would advise you not to go for the single premium policy but to go for an annual premium payment policy.
This is because in most cases, mortgage borrowers do not manage their mortgage for the entire period but generally prepay the mortgage as they accumulate the necessary funds. In such a situation, the part of the premium already paid under the single premium policy is wasted because the insurance policy is enforced when there is a corresponding liability outstanding.
In addition, if you are able to get a tailor-made term plan for your mortgage from the insurance company, you should ask the insurance company to reduce the sum insured based on the amount of the mortgage. courses at the end of each year. This will make your life insurance cheaper and affordable.
Should you buy the mortgage protection plans from the same mortgage lender?
First of all, let me clarify that neither banking regulations nor any other law requires the home loan borrower to take out a life insurance policy to cover the home loan. However in order to avoid the hassle of taking possession of the property and having to auction it off to collect the outstanding mortgage, most lenders insist on purchasing life insurance with the mortgage.
In addition, most of the banks providing the mortgage have either their life insurance associates or have made arrangements with some life insurance companies to sell their product in order to improve their income, these lenders require a policy. life insurance through them, which is not mandatory for you at all. In the event that the life insurance policy offered by your lender is not the cheapest, you can refuse to oblige. If the lender does not take this into account, you can ask them to produce in writing the obligation to take out a life insurance policy as an obligation and condition precedent to granting the mortgage. Since the lender cannot give it to you in writing, they will agree even if you take out a life insurance policy from another insurance company and give it to them.
Let me clarify that while purchasing a life insurance policy with the home loan is not mandatory, it is in your own best interest and in the best interests of your family members that you purchase one. term plan to cover your mortgage liability to provide peace of mind for you and your family members.
Balwant Jain is a tax and investment expert and can be contacted at [email protected] and @jainbalwant on Twitter.
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