A home loan helps in arranging the finances required to buy a house. However, life has its fair share of uncertainties, and so it is important to be prepared if you are not able to repay the loan. This is why lenders offer home loan protection plans and term life plans. A home loan protection plan (HLPP) is one that will help in covering the outstanding home loan amount if the borrower passes away. In this case, the borrower’s family members are financially protected from the burden of clearing the loan.
On the other hand, a term life insurance plan helps the dependents of the policyholder should they face a financial crisis. The coverage of this policy kicks in case of the policyholder’s unfortunate demise and is valid for a specific term selected by them.
To choose between the two, here are 4 points that need to be considered:
- Premium payments
Generally, most home loan protection plans have a one-time premium payment whereas term life plans require scheduled premium payments of lower denominations. Since the HLPP requires a single premium payment, it is higher than the premiums of a term life plan. However, do note that if the HLPP needs to be foreclosed, the premium amount paid for it will not be refunded.
A home loan protection plan is only meant to cover the home loan and nothing else. The amount received from this plan can solely be used to clear the outstanding loan amount. With a term life plan, the death benefit received by the nominee can be used for any purpose. The coverage is not restricted to any liability of the insured. In addition, an HLPP is not portable and cannot be switched between lenders.
- Life coverage
An HLPP covers the sanctioned amount of a home loan. As the loan gets repaid, the coverage of this plan will keep declining, eventually reaching zero once the loan is repaid in full. However, a term life plan is bought with a specified protection cover. The coverage amount of this plan will remain intact and help repay any liabilities in case of the policyholder’s death. There are certain plans, which even offer maturity benefits if the insured has outlived the plan.
- Option to customise
When you apply for home loan, there is always an option of refinancing or modifying its tenure in the future. With a term life plan, it is possible to increase the coverage based on financial responsibilities. On the other hand, since the premium of an HLPP has been paid in full, it cannot be modified. Therefore, if the home loan tenure is extended for another 5 years, it will be without protection from an HLPP for that extended tenure.
Now, it is always important to check with the lender about its home loan eligibility criteria, home loan interest rate, and so on. Having a home loan protection plan might improve chances of loan approval since the lender’s risk is reduced. However, if you are looking to secure other liabilities other than the home loan, a term life plan might be more suitable.