A life cover works better than a home loan protection plan, simply because it gives more bang for the buck.

There is the good sales pitch. And there is the bad sales pitch. And between them is the not- so-bad sales pitch. Allow us to explain. When an insurance agent asks you to invest in a unit-linked insurance plan (Ulip), promising that your money will triple in five years, that's the bad sales pitch. The money may or may not triple in five years. There are no guarantees. When a financial planner asks you to buy a term insurance policy to insure your life, that's the good sales pitch. In case something were to happen to you, your family will be financially secure. In between lies the notso-bad sales pitch, which you might experience while applying for a home loan.

The marketing manager at the bank or housing finance company (HFC) will try to sell you an insurance policy along with the home loan. He will tell you that if you buy this insurance policy, known as the home loan protection plan (HLPP), along with the home loan, then in case of your death, the insurance company will pay the bank the principal amount of the remaining portion of your home loan. This, in turn, means that your family can continue living in the house.

The marketing manager will persuade you that you need to make a one-time premium payment for the policy. If you don't have the money to pay the premium, the amount can be included in the loan. This, of course, will mean paying marginally higher equated monthly instalments (EMIs). But you may be better off buying a term policy on your life rather than taking an HLPP. Here's how it can be more beneficial.

Cover for your home loan

The marketing manager is neither at fault, nor is he trying to con you. He's just trying to get a higher commission. The onus of handling your biggest investment decision falls on you. To own your house, you will have to take a huge loan and until you pay it off completely, you don't own the house in the strictest sense of the term. Suresh Sadagopan, a certified financial planner, who runs Ladder 7 Financial Advisories says, "If something happens to you, your family shouldn't be evicted from the house just because they can't afford to continue paying the EMIs. It's natural that the bank will acquire the property if the borrower/family defaults on the home loan. Also, with spiralling real estate prices coupled with a huge loan amount, it's in the best interest of the borrower to take an insurance cover against the loan."

This reiterates the importance of insuring your home loan, but is a home loan protection plan your best choice? No, a cheaper and better option is term insurance. A term insurance cover is a pure insurance cover where in case of the death of the policyholder, his nominee gets the sum assured (or the cover amount as it is commonly known). If the policyholder survives the period of the policy, he does not get anything.

Term Insurance Vs HLPP

A home loan protection plan works similar to a term life insurance policy. The risk cover will be equal to the outstanding loan amount at any point of time. But home loan insurance works on a reducing balance principle. As the outstanding loan amount reduces, the size of the cover also reduces. Let us assume that you have taken a 20-year housing loan of 50 lakh at 9.5% in November 2010. You have also opted for an HLPP with a cover of 50 lakh by paying a single premium amount of 1,72,650 (see graphic). By December 2017, the outstanding loan amount will be over 41 lakh. If the borrower dies at this stage, the insurer will pay off the balance 41 lakh directly to the bank or the borrower's family. If this example had to be extended to the term cover, the family will get the entire cover of 50 lakh. Even after settling the loan amount, the family can still make a saving of 8 lakh.

So, even if the total premium outgo is higher for a term premium if paid for the entire policy term, it is still worth the buck. So the term plan is better. A term insurance policy in this case will mean paying a premium of 11,236 per year or 2,24,720 in total. But the advantage is that it need not be a one-time payment as is the case with HLPP. "The biggest advantage of a term plan is that the life cover remains constant in a term plan over a period of time whereas in an HLPP, it keeps declining," says Amar Pandit, certified financial planner, My Financial Advisor.

Secondly, you pay a one-time premium in a home loan insurance whereas you make periodic premium payments in a regular term plan. "You are spreading your payment over a period of time and hence the outflow for a certain risk cover is much lower in a term plan," Pandit adds. "Under an HLPP, the principal amount, which is over 1.72 lakh, is parked with the insurer. If you stick to a conventional term plan from your early years, you will benefit from lower premiums. You can actually park the surplus funds in high-growth instruments such as equity-linked savings schemes initially, which also provide similar tax breaks instead of locking in at higher premiums," Sadagopan says.

Source: http://epaper.timesofindia.com/