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  • What is a Housing Loan Protection Plan and What are its benefits?

    Buying and owning a home of your own is beneficial in many ways. Even though buying a home of your own is huge investment, it is a good one because land is an appreciating asset.

    When you purchase a house with the help of a home loan, the loan itself becomes a liability which is payable over a number of years. In the unfortunate event of death or disability of the borrower, the payment of the loan amount shifts to the dependants of the borrower. If the borrower is the sole earning member of the family, it becomes difficult for the dependants to pay the remaining loan amount.

    It is known that when a borrower applies for a home loan, the house which is purchased serves as a collateral for the bank until the entire loan amount is paid back. So in the case of death of the borrower, if the dependants are not able to pay the remainder of the loan, the bank has the right to sell the house to recover the remaining amount left on the loan.

    What is home loan protection?

    Housing Loan protection is an insurance plan which has been introduced by banks where in the case of the borrower’s death or disability where there is loss of income, instead of the burden of the loan falling on the dependants, the loan is paid by the insurance company. Some banks make it mandatory to have a loan protection plan to get the loan approved.

    The Housing loan protection plan serves as an insurance which is usually added up together with the home loan which is taken. Insurance companies and the bank provide this insurance as it acts as a guarantee in the event of death or disability. If for example a borrower, takes a home loan of Rs.50 lakh from the bank, the premium on the insurance cover is added to the cost of the loan. So for a 10-year cover, the premium is Rs.60,000, then the total loan amount becomes Rs.50.6 lakh.

    The EMI of the home loan will then comprise the principal, interest and the insurance premium. It should be noted that if the insurance premium is paid along with the loan as a component of the EMI, tax deductions cannot be claimed. If the premium is paid separately by the borrower, then the claim on tax deduction can be made.

    What is the structure of housing loan protection plan?

    When it comes to the payment of the Housing Loan protection plan, the structure of payment is very similar to a Term Insurance Policy where the payment options are:

    • EMI - Equated Monthly Installments or EMI payments to be paid every month over the tenure of the loan. For the Housing Loan protection plan, the insurance premium is added to the EMI of the home loan and paid as one.
    • Single Premium Payment - In this payment option, a single premium is paid while taking the insurance. In some instances, housing finance companies club this payment of premium with the home loan amount.
    • Limited Pay - This is another option where the premium for the insurance can be paid only for a limited duration of the tenure of home loan.

    What are the ways to insure a home loan?

    There are mainly two ways by which you can insure your home loan. They are:

    • Term Insurance - This type of insurance protects all your assets and liabilities. There are a number of benefits of taking a term insurance which are:
      • Since the cover in a term insurance plan remains constant throughout the tenure of the loan, the dependants of the borrower will receive a fixed amount of money in the event of death rather than a reduced amount.
      • Fluctuations in the rate of interest might cause an extension on the schedule of EMI. You have to do your own research to find a home loan protection plan you choose will cover an extension in the tenure of the home loan.
      • Term insurance allows you to shift from one loan provider to another without it affecting your home loan.
      • In case of a term insurance plan, the insurance cover is consistent as long you continue to pay your premium even if you foreclose your home loan.
    • Separate Home Insurance - A Separate Home Insurance protects your outstanding home loan in the event of death or disability of the borrower.

    What else does home loan insurance cover?

    Apart from loan coverage in the case of death, most home loan or housing loan protection plans comes with rider plans which are optional but also highly beneficial. Apart from death, these rider plans include:

    • Terminal Illness
    • In the event of an Accidental Death
    • Unemployment for three to six months of EMI payments
    • Disability

    Purchasing a home or housing loan protection plan might seem to be an additional expense to be paid along with a large amount of money which you have already borrowed and needs to be paid off. However, it is advisable that you do invest in a home loan protection plan in order to safeguard your home as well as your family from any kind of unforeseen circumstances.

      

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