India is a developing country with people moving up the prosperity ladder at a rapid pace. The first major expense that most people bear as their income rises is towards buying a house. Home loans are a preferred tool for a majority of people aiming to buy a house. However, the nature of the home loan is drastically different from other forms of financing. A home loan typically lasts for 20 years or above. Taking a home loan essentially means creating a long-term liability for your family. Moreover, in the younger years of life, the home loan is not the only debt one has, there are other medium and short-term borrowings like car loans and credit card bills.

Due to increased borrowing, the level of household debt in India has increased significantly. Availing a home loan to buy a house is a prudent decision, but you have to take into account the repayment schedule and plan for all eventualities.

Default risks

No one takes a loan with the intention to default, but many things can go wrong during the tenure of a loan, especially a long-term loan like home loans. The responsibilities as a borrower start after the loan is disbursed. One has to pay a fixed instalment every month, which includes a part of the principal amount and the interest. For instance, if you avail a home loan of Rs. 25 lakhs at 9% interest for a tenure of 20 years, you will be paying Rs. 22,525 every month. The liability remains until the entire loan is paid off. However, a number of people default during the tenure of the loan, primarily due to factors such as:

• Critical illness
• Loss of income due to disability
• Death

The family of the borrower becomes the primary sufferer especially in the case of default due to death of the primary bread earner. Term insurance for a home loan can help you ring-fence your family from the liability in your absence. Term insurance plan for a home loan can help you protect your family in your absence. Basic term insurance against home loan could help in the event of the insured’s premature death and provide funds for the repayment of the loan. However, the other two major instances of default too have to be taken into account. One may opt for riders while buying term insurance online to protect against loss of livelihood due to disability or critical illness. Term insurance for a home loan with suitable riders enhances the coverage of the plan and protects your family in adverse circumstances.

How much term insurance cover is needed?

The primary aim of buying term insurance is to give your family a financial cushion in your absence. One of the major term insurance benefits is the flexibility of the product. The sum assured can be paid in regular instalments to substitute the monthly income, or can be paid as a lump-sum amount depending up on the product terms and conditions. The cover for the liability of the home loan should be over and above the amount required to provide your family with a comfortable life. You can consider your sum assured to be equal to at least 10 times your annual income plus the outstanding amount of the home loan. You need to evaluate your needs basis your risk appetite before deciding the quantum your term insurance cover.

Opt for a decreasing term insurance

A term insurance benefit is often ignored. The sum assured of a regular term insurance plan remains constant throughout the policy tenure. Similarly, the premiums of term insurance remain the same for the entire tenure of the plan. However, if the aim is to take a term plan to cover home loan liability, a constant amount of sum assured may not be the ideal choice.

The outstanding amount of the home loan starts decreasing at a gradual rate as you start paying the monthly instalments. Maintaining the same level of insurance cover for the entire tenure of the home loan is not necessary. However, it is not possible to reduce the sum assured of a regular term insurance plan once it is bought. Decreasing term insurance can be a better option to cover the liability arising out of a home loan. The sum assured of decreasing term insurance reduces on a monthly or annual basis until the end of the tenure of the policy. The premium of decreasing term insurance plans remains constant, just like a regular term insurance plan.

Conclusion

The right amount and type of insurance can help you cover the home loan for your dream house. It will ensure that your family does not have to live with a debt burden in your absence. When you buy term insurance online, you may opt for decreasing term insurance to calibrate the outstanding loan amount with the insurance cover.