The banks are steadily increasing their loan interest rates, much to the grimace of both new and existing buyers. While this increase in the interest rates is not expected to subside in the coming months, which means that you will have to continue repaying your loan at the new interest rates. This surge in interest rate has caused many borrowers apprehensive about their ability to repay their loans on time. Some have even sought an extension of loan tenure, which means that they would now be repaying the loan over a longer period. This brings us to the question, “How would the loan be repaid in case of an unfortunate mishap involving death, disease or disability?”. Sad as it may sound, this is a pertinent question that borrowers must ask themselves while seeking high-interest loans or while deciding to borrow for a prolonged period.
You cannot deny that your house symbolises your standing in society. Apart, it is a sign of the extent to which you can financially secure the future of your loved ones. A family without a roof is akin to living on the streets, which is why many people insist to buy homes instead of living on rent throughout life. However, if the house has been bought on loan, it makes sense to ensure the financing of the loan in the event of sudden contingencies. This brings us to the understanding of how a home loan cover can shield from families succumbing to loan pressure and losing their homes. Apart, it relieves the surviving members from bearing the burden of the loan, which means that they can simply use the cover to service the loan sans the fear of losing the roof on their heads.
How home loan cover works
Also called home loan insurance by many, taking a home loan cover reduces the risks associated with borrowings for a home or property. You can equate this cover with a life insurance plan that pays for your expenses in the event of the sudden death of the family’s breadwinner. The home loan cover acts similarly by repaying the loan in case of the untimely death of the borrowers. This also helps if borrowers are incapacitated by an accident or disease resulting in terminal illness. The insurance company repay the outstanding loan, on behalf of the borrower, pursuant to the cover bought.
There is another benefit associated with taking a home loan insurance cover depending on the policies of your insurance company. This is because some plans also cover emergencies including losses due to burglary and fire. However, this is subject to the maximum amount of sum insured and not the price of your valuables stolen or destroyed.
Add to it the tax benefits too, and you will realize how a home loan cover is worth your consideration. Viral Bhatt, Founder, MoneyMantra says, “You can avail of tax deductions under Section 80C of the Income Tax Act 1961 on the premiums you are paying for a home loan protection cover.”
Know the risks covered
Not all insurance companies treat their policies similarly, which means that you must read the content in the fine print before signing on the dotted line. While the basic features of all the home loan insurance plans remain the same, some plans offer added features to their policyholders including covering the cost in case of sudden disease, accidental death benefits, etc.
Adhil Shetty, CEO, BankBazaar.com says, “Home loan insurances should typically cover terminal illness as well. The onset of terminal illness in a borrower can throw all the repayment plans of the borrower out of the window. A home loan insurance that covers terminal illness would ensure that the loan gets repaid even in such eventualities, and the borrower and their family can focus on the health issues instead of financial ones. Another aspect that the home loan insurance should cover is temporary job losses of 3-6 months. This will ensure that there are no missed payments in case of a job loss, reducing the mental and financial stress on the borrower in trying times. While all loan insurance products have a death cover, it is critical to understand the scope of the death cover, does it cover only natural death or if it covers accidental death as well, or vice versa? This will take care of the majority of the situations that can arise.”
Remember that the cover you are seeking depends on what the company is offering, which is why you must look deep into the fine print. For example, many people ignore checking the concept of surrender value while buying a home loan cover. This is because the coverage amount may cease when you are transferring the loan from one lender to the other. This means that you may get the surrender value from a fully paid-up policy but will have to buy another cover to cover your new loan or the existing loan transferred to another lender.
Interest rates are subject to change during the loan tenure, and that is why banks and lending companies insist on giving you the loan at floating interest rates. This means that if the loan interest rate goes up, you are under an obligation to repay a higher amount due to the increased interest amount. You may assume that the insurance company will automatically increase its coverage subject to the new interest rate. However, this depends on the insurer’s policies, which is why you must be aware of the risks that they cover.
What do they include and exclude?
You may be aware of the risks included in the policy. Are you aware of what it excludes? The lists of both inclusions and exclusions matter when buying any kind of insurance cover. For example, many companies cover disabilities but exclude disabilities due to mental illness. While death is covered under all the policies, some companies refrain from paying out on death during pregnancy or childbirth. And, there are other exclusions similar to life and health insurance plans like death due to pre-existing illnesses or injuries, death due to suicide or damage due to unnatural acts of humans like war, etc.
Learn more to know more
First things first. Do not confuse home loan insurance with home insurance though some home loan policies may provide coverage on your home and belongings depending on the outstanding loan amount. Some insurance companies give you an extra edge by continuing to offer you protection despite you having prepaid your loan amount. Some home loan cover policies offer add-on benefits too in case of critical illness, partial disability and the resulting loss of income.
The trick is to avoid policies that come with a long list of exclusions and embrace those offering more inclusions and wider coverage than their peers. However, beware of the latter too. As goes the famous adage “There ain't no such thing as a free lunch.”