Home Loan Insurance vs Term Policy: Which One is Better?

Home loan insurance and term insurance policy both offer protection against life's uncertainties. However, the end-usage and the intent of these two products are largely different. While talking to aspiring home loan applicants, we have seen there's a gap in understanding the difference between these two insurance products. Taking this into account, we have penned this blog outlining the differences between a home loan insurance and a term insurance plan.

What is Home Loan Insurance?

A Home loan insurance, also known as mortgage protection insurance, is specifically designed to cover your outstanding home loan repayments in case of an unfortunate event. 

What is a Term Policy?

A term policy, or term life insurance, is a life insurance plan that provides a broader coverage and is not restricted to the liability due on the property. Just like home loan insurance, your family will benefit if anything happens to you during the loan term. 

Loan Insurance vs Term Policy: A Comprehensive Comparison

1. Coverage

Home Loan Insurance

• Covers only the outstanding loan amount.
• Coverage decreases as the loan balance reduces.

Term Policy

• Provides a fixed sum assured throughout the policy term.
• Coverage remains constant regardless of the loan balance.

2. Premium Payments

Home Loan Insurance

• Often, a single premium payment is made upfront.
• It can sometimes be added to the loan amount.

Term Policy

• Regular premium payments (monthly, quarterly, or annually).
• Separate from the loan amount.

3. Flexibility

Home Loan Insurance

• Tied to the specific home loan.
• Limited flexibility in terms of coverage and beneficiaries.

Term Policy

• Not tied to any specific loan.
• Offers flexibility in coverage.

4. Benefirciary

Home Loan Insurance

• In case of policyholder's death, the insurer pays the sum assured for that year to the bank,
• The bank acts as the beneficiary.

Term Policy

• In case of policyholder's death, the insurer pays the sum assured to the nominee. 
• The nominee is the primary beneficiary.

5. Tax Benefits

Home Loan Insurance

• Premium payments may be eligible for tax deduction under Section 80C.

Term Policy

• Premium payments are eligible for tax deduction under Section 80C.
• The death benefit is tax-free under Section 10(10D)

6. Tenure

Home Loan Insurance

• Tenure equivalent to the home loan tenure.

   

Term Policy

• Tenure of your choice.

Insurance Comparison: Pros and Cons

Home Loan Insurance

Pros

• Ensures loan repayment in case of the borrower's death..
• Premium rates are generally included in the home loan repayment schedule.

Cons

• Premium rates are generally higher.
• Coverage decreases with repayments.
• Limited flexibility in terms of coverage.

Term Policy

Pros

• Not tied to only home loan - provides broader coverage.
• Provides consistent coverage throughout the term.
• Affordable premiums.

Cons

• Benefits offered only at the time of death of the policyholder.
• Premium rates may increase with age.

Factors to Consider When Choosing Loan Protection

1. Cost: Compare the long-term costs of both options.
2. Coverage needs: Assess if you need coverage beyond the loan amount.
3. Flexibility: Consider your need for adaptable coverage.
4. Health condition: Factor in any medical requirements for policy approval.
5. Tax implications: Evaluate the tax benefits of each option.

Case Study: Loan Insurance vs Term Policy

Let's consider a hypothetical scenario:

• Loan Amount: ₹50 lakhs
• Loan Tenure: 20 years
• Borrower's Age: 35 years

Home Loan Insurance

• Single premium: Approximately ₹2.5 lakhs.
• Coverage: Decreases from ₹50 lakhs to 0 over 20 years.

Term Policy

• Annual premium: Approximately ₹10,000 for ₹50 lakhs coverage.
• Total premium over 20 years: ₹2 lakhs.
• Coverage: Constant ₹50 lakhs for 20 years.

In this case, the term policy offers more comprehensive coverage at a lower overall cost.

Making the Right Choice

The ideal choice between loan insurance and a term policy depends on your specific circumstances. Consider the following:

1. If you want coverage specifically for your home loan, loan insurance might be suitable.
2. If you need broader coverage and more flexibility, a term policy could be the better option.
3. If cost-effectiveness is your primary concern, a term policy generally offers better value.