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Home > Business > Special


Why you need a mortgage insurance

Sunil Dhawan, Outlook Money | November 24, 2006

The only thing certain about life is that nothing about it is. Somebody may borrow to buy a house and be very diligent about paying the EMIs. But what if he meets with an untimely death? Not only does his family have to deal with the emotional loss, but also with the goons from collection agencies who will descend upon the family to collect the skipped EMIs. A cover equal to the value of the loan is essential to protect the future of his family.

The person might say that he has already got a term cover. But that is for income replacement and for meeting the living costs and other financial goals of his family. This one is an extra cover that he needs. Mortgage insurance is relatively new in India and of the 14 life insurance companies in the market, only MetLife Insurance, HDFC Standard Life Insurance, Allianz Bajaj, Reliance Life Insurance and SBI Life Insurance offer this cover. TATA AIG provides it only through its group policy.

Loan cover term assurance policies, as the plans are called, work like this: to protect a loan repayment schedule, they offer a cover that decreases as the value of the loan outstanding falls. The premium, however, remains the same for the entire duration of the cover. You can pay either a single premium or annual regular ones. If you take the regular premium plan, the premium paying term is only two-thirds of the policy term.

In a regular plan, you can terminate the cover if you pay off the loan sooner than the loan term. A single premium would actually be a loss if the term of your cover comes down due to prepayment of the loan. Upon the borrower's death, the insurance company pays the outstanding amount of the loan to the bank. Remember to avail the same Section 80 C tax break on this one as you get on other life polices.

Sounds good, but we find that it is actually cheaper to buy a pure level term cover instead of this specialised product. The only difference is that you may be insured for more than the loan outstanding after a certain number of years.

With little difference in premium between the two (see Demystifying Home Loan Covers), why not go for a higher cover with a pure level term? In the event of an untimely death, the outstanding home loan amount can be settled from the term plan and the balance term insurance amount remains with the family.

Tax kick: Deduction u/s 80C up to Rs 100,000 from the total income.

Demystifying Home Loan Covers

The difference in premium outgo of loan cover and pure term plans is marginal. So go for pure term.

 

  Loan Cover Term Plan1                 

Pure Term Plan

Annual
premium option

Single
premium option

Annual
premium option

Single
premium option

Sum assured (Rs)

20,00,000

20,00,000

20,00,000

20,00,000

Premium (Rs)

8,630

44,260

5,590

51,720

Loan term (yrs)

15

15

15

15

Premium paying term (yrs.)

10

Once

15

Once

Total outgo (Rs)

86,300

44,260

83,850

51,720

Figures for HDFC Standard Life Insurance policies for a 30-year-old individual
1If a Rs 20-lakh loan is being covered, the cover keeps going down as the loan instalments are paid off.


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