Home Loan Insurance vs. Term Insurance: Which one should you buy?

Having your own house is a dream which many have dreamed about at a certain point in their life. Sitting on a sofa with a hot cup of tea in your own home is something which cannot be explained in words.

Some people see houses as an asset and so they purchase them for investment only. For some people, houses are a place where they build and connect with their loved ones. These people buy houses for their use.

However, everything has its own cost and houses are not cheap nowadays. They burn a fortune in your pocket.

This is the reason, many people do not purchase a house. It is quite costly. Since homes are too expensive, there are very few people who manage to save enough money to buy them. Therefore, most people have to approach banks to avail of home loans to raise funds for purchasing their dream home. What if the borrower dies without repaying the loan amount? This is where insurance helps. For any person who buys a home, Home Loan Insurance and Term Insurance are the two most important factors to consider.

What is Home Loan Insurance?

Let’s consider someone who took a home loan from a bank or a lender like licensedmoneylender.com/ to purchase a house property. In return, the bank charges a fixed monthly repayment instalment amount from him. Now, suddenly the borrower is not able to repay his home loan due to some unforeseen circumstances. These cases could be a job loss, permanent disability or death of the borrower.

Home loan insurance or Mortgage insurance comes to the rescue in such conditions. 

Such scenarios are covered by these loans. If the person is stuck in such scenarios, the insurer pays the outstanding home loan amount to the bank. If such a case arises, the mortgage insurance makes sure that the family of the borrower is not burdened with loan repayment.

Features of Home Loan Insurance:

1. Loan Cover: It covers only the outstanding loan amount of the home if the policyholder dies, or happens to be disabling illness or job loss.
2. Reduction Cover: The cover, with time, reduces simultaneously as the loan is prepaid.
3. Single Premium Payable: It is a one-time premium payable that is most frequently covered in the home loan. Most of the plans add it to the loan amount.
4. Beneficiary is the Lender: If the borrower dies, then the insurance amount is paid directly to the lender.
5. Optional Add-ons: Some policies offer riders like critical illness cover or accidental death benefits.
6. Tax benefit: in some cases, premiums paid for home loan insurance may give tax benefits.

What is Term Insurance?

Term Insurance is the one where the death benefits are paid when the insured person dies during the period covered under the policy. 

After that the benefits go to beneficiaries through a cash lump sum upon death of the insured. 

However, unlike normal life insurance policies, the term life insurance policy does not earn a cash value over time.

The insurance period for term policies is usually long, eg – 10, 20 or 30 years.

Features of Term Insurance:

1. Fixed Coverage: The sum assured does not decrease over time.
2. Affordable Premiums: At a low premium offers high coverage term insurance.
3. Flexible Payout: The insured person’s family is entitled to receive a lump sum payout or monthly income as decided by the plan.
4. Family’s Financial Security: The payout is available for any use, not only for the home loan.
5. Customizable Add-ons: Critical illness, Accidental death, Disability benefits etc can be opted.

Differences Between Home Loan Insurance and Term Insurance

Which One To Opt For?

This completely depends on your requirements, your current financial status, and what purpose you want to fill. Let’s work through to understand when to buy term insurance and home loan insurance:

• When To Buy Home Loan Insurance?

• If you simply want to insure your home loan and prevent the EMIs from being a burden to your family after your death

• If you do not have some other financial dependents what matters the most is home loan repayment.
• If you are seeking a one-time premium payment against a regular premium payment.

• When to buy Term Insurance?

• You want to safeguard not only your home loan but also have the freedom to support your family.
• There are some financial liabilities like children’s education, daily expenses, and other loans.
• If you feel you need the flexibility to use the sum assured for all financial requirements.
• In case you need an easy-on-the-pocket insurance plan that would have a higher coverage.

Why Term Insurance is a Better Option

Although home loan insurance is not compulsory and serves its purpose only for those who want to secure their investment and protect their family future. While term insurance is generally a better option because:

Higher Coverage: Opting for term insurance provides life coverage beyond the loan amount.

Flexibility: Your family can use the payout for various financial needs and not necessarily loan repayment only.

Affordability: It provides more coverage at a lesser premium if you go with term insurance.

Beneficiary Control: Your family gets the insured payout directly, and in-home loan insurance, the beneficiary is the bank.

No Dependency on Loan: Even if your home loan is paid earlier than scheduled, your term insurance will be in force, whereas home loan insurance will become unnecessary when the loan is paid off.

Conclusion

Home loan insurance and Term insurance both are significant tools for securing your home and your future. Think of your long-term financial security while obtaining a loan, rather than the loan repayment only. While home loan insurance ensures your loan is covered, term insurance provides for the family financially in more than one manner. You are better off considering term insurance if you can only afford one policy since it offers broader benefits for financial security besides loan repayment.

Think twice before making a decision, compare different plans, consider your financial goals, and choose wisely.