Although most financial advisers suggest choosing a term plan that is substantial enough to provide financial support to family, insurance companies also offer loan protection plans that are meant to care for outstanding loans in case of unforeseen circumstances. As per the loan schedule which is determined at the time of buying the policy, a loan insurance plan covers the balance that is remaining in case of the loanee’s death.
This plan is beneficial for any-value and any-term mortgages like home loans, personal loan or micro loan. However, although their premiums may be higher, some insurance companies also offer covers for unsecured loans like personal loans and car mortgages. The premium rate at which you get insurance can be influenced by multiple factors such as the age of the borrower, the borrower’s medical history, the loan amount, the tenure, the moratorium and many more.
So ultimately, does it make sense to opt for a loan insurance plan or term insurance? Let’s take a look at both options in detail.
Cover bundled with loan
A housing finance company as well as a bank or any lender will find it beneficial for their customers to take out a loan insurance cover since it means the outstanding loan amount is secured even in case of the borrower’s death. These companies usually bundle the loan insurance cover within the loan amount. Hence, if the person is opting for a loan of ₹30 lakhs with the premium for the 10-year cover being ₹50,000, the loan comes up to ₹30.5 lakh. In this case, the client can choose to pay their premium themselves or gets added to the loan amount through their lender.
The premium paid towards this is eligible to receive a tax deduction under Section 80(C) of Income tax Act 1961 up to a maximum limit of INR 1.5 lakh, subject to provisions stated therein
Another essential feature of loan insurance covers is that their insurance will progressively reduce as the loan continues to get repaid. On the other hand, with a term life insurance cover, the coverage remains constant for the borrower.
Single premium option
As per the single premium option, if a borrower plans to prepay her/his loan amount the cover can be terminated and applicable surrender value is paid to the customer.
Now, on the flip side, if the borrower decides to increase the tenure of her/his loan as he/she noticed a hike in interest rates, her/his insurance cover might not be sufficient to fully cover her/his loan. The reason for this is that the insurance cover would reduce as per the original loan amortisation schedule. With an extension of the loan tenure, the principal outstanding amount would reduce at a slower pace.
In the situation where the borrower passes away unexpectedly during her/his loan term, the nominee will have to shell out the difference between the actual outstanding amount and the insurance pay-out. In the situation where the borrower survives the policy term, she/he will find that they still have EMI payments remaining even after the loan insurance cover she/he had taken has ended. In case of death during this period, the nominee will have to repay the outstanding loan amount as the insurance cover is no longer valid. Hence, a term insurance plan makes for a better option since the nominee will directly receive policy benefits with no change to coverage in case the life insured passes away.
Apart from offering a death benefit, term plans also offer coverage against disability with nominal extra cost as a result of accidents or a critical illness diagnosis in the form of additional riders. The benefit received will be payable in case the life insured is permanently disabled from an accident or diagnosed with certain specified illnesses during their policy’s term subject to the terms and conditions of the plan. Ensure you browse the range of coverage offered by a term plan carefully before buying the policy.