15 Mar, 2022 | Term Life Insurance

How To Get A Term Insurance Policy To Cover A Home Loan?

Team Beshak
By Team Beshak
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Introduction

All of us grow up with a certain set of ambitions and dreams which we try to achieve at some point in our lives. For some people, the dream could be visiting a country they’ve always wanted to see, for some, it could be buying a car, for some, it could be serving the nation, and the list goes on. 

Similarly, let’s say you and your wife share a dream of buying your own house. To fulfil this dream, you may have to take a home loan of INR 1 Crore that you’ll have to pay back to the bank with an interest rate. Have you ever thought about what would happen if you pass away before settling the loan?

The bank will demand the rest of the loan settlement from your spouse and family. If your spouse is not well-versed with this decision you’ve made and is taken aback when she hears about the loan and has to deal with the stress of repaying it. Now, the responsibility of the loan settlement shifts to their shoulders, without them knowing how to go about it. 

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To avoid putting your family through such stressful situations, and to ensure that your loans and liabilities do not burden your family - it would be ideal to buy an insurance policy to cover the amount of the home loan. For this, you can either get - 

👉 Home loan insurance/ Home loan protection plan

Home loan insurance is an insurance plan which is similar to term insurance that will cover your outstanding loan amount in case of your untimely demise and protect your family from the burden of repaying the loan. Home loan insurance plans are offered by banks and financial institutions who provide the home loan - it is often bundled and mandatorily sold along with the loan you take. It will provide you cover until you repay the entire loan. 

The sum assured of the home loan protection plan will keep on reducing with time and in case you pass away before the loan is repaid, the remaining loan amount will be settled by this insurance. This plan, however, might cost you more than a regular term plan as you’re generally required to pay the premium amount in one go.

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👉 Decreasing term insurance

If you’re buying the term insurance policy solely for the purpose of safeguarding your family from bearing the burden of your loans, you can buy a term plan with the decreasing cover feature. A decreasing term insurance plan makes more sense because as you repay your loan every year, your liability towards the home loan will keep on decreasing as well.

With this plan, the sum assured of your term insurance will keep on reducing every year at a predetermined rate. And in case you pass away during the policy duration before the loan is repaid, the insurer will pay the claim amount to your family. Your family can use this amount to pay off the home loan, without having to make any compromises to their lifestyle or dreams. 

In this article, we talk about 5 important things you must keep in mind if you’re buying a term plan, especially to cover a home loan. 

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5 Things you should do if you're getting a term insurance just to cover your home loan

1️⃣ Calculate the right cover amount 

Before you buy a term insurance policy, you need to calculate the right cover amount for your family. It should be an adequate cover amount that will help your family live a comfortable life even after you pass away. 

Now, you might have heard about the most commonly recommended thumb rule of “20x your yearly income” to calculate a term insurance cover. But, this formula is flawed as it doesn’t take into consideration your family’s needs and requirements. To arrive at an appropriate coverage amount for your family, you’ll have to account for all your financial commitments, living expenses, liabilities, and existing wealth

For this, you could simply use Beshak TruMatch. All you’ll need to do is answer a couple of simple questions related to your current financial situation, your long-term plans, and your family’s goals. Beshak TruMatch will churn these inputs, and give you a scientifically calculated cover amount that fits your family’s needs best.

2️⃣ Choose the Lump-sum Payout Option

Most term plans allow you to customise the claim payout option. This means you get to choose how you want your family to receive the claim amount after your death. Generally, there are three options available - monthly income, lump sum, and a combination of both.

If the main purpose behind you buying term insurance is to help pay back the home loan, we recommend you to opt for the Lump-sum claim payout option, wherein your family will receive the entire claim amount at once. They can use this amount to settle the loan and take complete ownership of the property.

3️⃣ Choose a policy duration to match the duration of the loan repayment

Policy term or duration is the time period until when the policy will remain active (provided you pay all your premiums on time). When you opt for a term insurance plan to cover your family for a home loan, ensure that the duration of the policy at the very least matches the duration of the loan repayment or even exceeds it.

This way, you can be sure that either you or your term plan will clear out the loan amount - and your family will not need to bear the burden of payments in any case. 

4️⃣ Take your family through the policy details 

You are not always going to be around to help your family. So, when you buy a term insurance plan, we advise you to sit down and explain to your family, especially the nominee, about the policy you’ve taken and take them through the policy details. By this, your nominee and family will have clarity about the claim settlement amount as well as the process and can prepare themselves accordingly.

5️⃣ Keep all the documents in one place 

It is also important that you keep your policy and all other important documents in one place. You can either use the Digilocker app or create an e-insurance account, store all relevant documents in digital format and share the account details with your nominee. This will ensure they have ready access to all the documents and there are no impediments during the claim settlement process. And lastly, if you have purchased the term insurance policy through a financial advisor, you should connect them with your family, so your family knows whom to contact if they have any queries related to the claim settlement process. 

These are some key things you should keep in mind when you are considering buying a term insurance plan to cover a home loan. Going through these simple steps will ensure that your term insurance plan does the job you bought it for - protect your family against the burden of a home loan, in case your death happens during the policy term. 


Confused about which customisation options to pick while buying term insurance and which to skip? 

Check out Beshak TruMatch -  the first-ever term insurance recommendation engine that recommends the right customizations you must pick so that your term plan is perfectly tailored to your family’s needs.

Key takeaways
  1. Home loan protection plan and term insurance are two insurance policies that will protect your family from the burden of your home loan, in case your death happens during the policy term.
  2. Home loan insurance is an insurance plan that will cover your outstanding home loan amount in case of your untimely demise, thereby protecting your family from the liability. 
  3. If you’re taking term insurance solely for the purpose of repaying your loan, you can opt for the decreasing cover feature - with this, your term cover will keep on reducing every year and your liability towards the home loan will keep on decreasing as well - as you repay the loan every year.
  4. If you pass away during the term insurance policy duration before settling the loan, your family will receive a claim which they can use to settle the loan.
  5. Before buying a term insurance plan you must calculate the appropriate term cover. Do not rely on the “15X/ 20X your yearly income” thumb rule.
  6. We recommend that you select the Lump-sum claim payout option - with the help of this your family can pay off the loan, immediately and own the property. 
  7. After buying a term insurance plan, you should take your nominee or family through all the policy-related details. Make them prepared for the future. 
  8. You can create an e-insurance account or download the Digilocker app, store all relevant documents in digital format and provide access details to your nominee to ensure they have ready access to all documents at the time of claim.
  9. If you bought your term plan through a financial advisor, make sure you connect them with your family.
Team Beshak
Written by,
Team Beshak, We breathe insurance :)

We are a group of young members of the Beshak community. We come together to brainstorm, write relevant and useful content for people (just like us) who want to figure insurance on their own. If you too want to share inputs/write for us - send us a "hey" to info@beshak.org

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