How Do Term Insurance Policies Manage Home Loan Risks?

Home loans have become the most convenient options of buying a house for anyone in India today. With easy EMIs and comfortable loan tenures, buying your own first home does not seem to be a distant dream anymore. However, as is the case with any type of loan, a home loan too comes with its own risks and obligations. In this case, the major risk involved is that of non-payment of the loan amount to the bank. Did you know that a term insurance plan can help save you from this risk to a large extent

To understand the connection between term life insurance and home loan risks, we would first need to understand why exactly there is a risk of non-payment involved in case of home loans.

What is a Home Loan Risk?

A person choosing to take a home loan signs up an agreement with the concerned bank or financial institution about repaying the loan amount within a specified tenure. However, there emerges an unspoken, implicit risk in this agreement – whether the borrower would be able to pay the entire loan amount back to the lender within the specified duration?

Why does this risk emerge in the first place? There are primarily two reasons responsible for this:

1. The untimely and unfortunate event of the death of the borrower, in which case the loan amount fails to be repaid to the lender; and
2. The diagnosis of a chronic health condition, terminal illness, critical disease, or permanent disability resulting from an accident, impacting the earning potential of the borrower

In either of the two situations, the borrower may fail to repay the EMIs either on time or completely. In some cases, failure to repay the loan may also lead to the property being forfeited by the lender.

This risk looms over the borrower always and since it is entirely beyond the control of either of the two parties, it can sometimes make taking home loan a dreadful choice for the borrower.

However, the good news here is that term insurance cover safeguards the borrower against this risk, encouraging them to realize their dream sooner. Let’s see how.

How Does a Term Insurance Plan Cover the Risk of Home Loan?

We understood from above that there is an inevitable and unpreventable risk involved in the home loan process. But there is a way out to beat that risk and proceed with realizing your dream of buying your favorite property without a worry.

You can easily buy a term insurance policy to protect yourself against such unforeseeable risks in future. In case of an untimely and rather unfortunate demise of the borrower, their family (dependents) can still repay the loan using the coverage amount (sum assured) provided as part of the term insurance plan.

In order to avail this death benefit under a term insurance cover, the policyholder needs to pay a certain premium regularly to the insurance company. This premium payable is quite affordable and can be easily paid monthly, in 6 months, or annually, as per the convenience of the insured.

Let’s learn more about how you can use a term insurance policy to cover your home loan risks.

How to Buy Term Insurance Cover for Home Loan Risks?

Here are different ways you can use term insurance for home loan to your advantage, ensuring that your loved ones never have to suffer in your absence with loan-repayment stress.

• Buy it as an add-on rider: This is the most convenient way to utilize the benefit of term insurance coverage for home loan risks. You can easily buy a term insurance for home loan protection cover in addition to your base term insurance plan at the time of buying or renewing the policy. This would give you the added advantage of being financially protected during any unforeseen eventuality, such as loss of income due to accident-induced disability or critical illness. Buying add-on riders like accidental benefit rider and critical illness rider ensures that your family would receive a lump sum which can be used towards both loan repayment as well as covering the costs of the treatment.
• Buy a home loan-linked term insurance plan: This can be particularly helpful if you already have a term insurance policy purchased for yourself and your family. In this case, you can simply invest in a home loan-linked term plan to provide additional coverage against the risk of home loan repayment. This plan is also known as decreasing term insurance.
• Buy term insurance for a tenure longer than that of your home loan: This would help ensure that you still have financial backup in case you are unable to repay the loan amount due to any unforeseen and unfortunate events in life. If not longer, try at least to buy term insurance for an equal duration of the home loan tenure so that you can continue to enjoy its benefits for a long time or at least until the home loan is fully repaid.

How to Calculate the Term Insurance Coverage Amount in Case of Home Loan?

Now that we know that buying term insurance is only going to do you good if you have a home loan, the next question arises: how much term insurance cover should you opt for with a home loan?

Ideally, the rule to go by in this regard is that the coverage amount that you choose for your term insurance plan must be as much as 10 times your annual income earned. In addition, the home loan amount that needs to be paid back to the lender should also be taken into consideration along with this calculation.

To help you further, here’s a simple formula to calculate your term insurance plan cover if you’re already under a home debt.

Life cover for term insurance = 10X of your annual income + the loan amount remaining to be paid to the lender

A term insurance policy that satisfies the above criteria is considered ideal for purchase since it would sufficiently cover your family’s financial expenses in your absence + help repay the loan amount as well by your family members.

To make things even simpler for you, there are insurance premium calculators easily available online. They help determine the exact premium amount payable in order to receive the plan benefits in future.

You too can enter your financial requirements in a home loan scenario on a home loan term insurance premium calculator. This would give you a fair idea of the total amount of premium that you’d need to pay for your term insurance policy.