Owning a home is a dream come true but it also comes with a long-term liability to pay off the loan. You have to pay a fixed amount from your salary every month to pay the home loan EMI. Perhaps, both of you have to work to ensure that there is enough left in the bank to pay for other expenses and save a certain amount for the future after paying the home loan, car loan and credit card dues.
Household debt in India has been increasing at the rate of 13% per annum for the last five years. Most alarming was the sudden increase of household debt by more than 80% in the space of year between FY 2016-17 to FY 2017-18.  As home loans are big ticket loans it makes up a large chunk of household debt. See the chart below for details.
Indian Household Debt Share
|Type of Lending||2013-14||2018-19|
Risks of default
The responsibilities of a homeowner does not end with purchasing a home; in fact it starts there and ends only after the entire home loan is repaid. If you purchase a home worth Rs. 40 lakh with a tenure of 20 years at 9% interest rate, you will have to shell out a monthly EMI of Rs. 36,000. You can increase the tenure to up to 30 years to reduce the monthly EMI but then your loan will get costlier, i.e., you will have to pay significantly more than what you took from the bank.
Home loan comes with a high risk of default, primarily for two reasons:
- Death or permanent disability of the borrower
- Critical illness
- Loss of job
In such a situation, a home loan linked term plan can protect the surviving members of the family from being crushed by the heavy home loan debt. A term plan may not help in case of a normal job loss but it can definitely help in case you lose it because of critical illness or major accident. However, you will need to buy riders to secure yourself for such eventualities. In case of death of the borrower, family members can use the death benefit received from the home loan linked term plan to pay off the home loan and ease the financial burden on the family.
How much term plan you should take if you have a home loan?
Safeguarding your family against the debt is the primary objective of your home loan linked term plan. Though home loan providers also offer home loan protection plans bundled with the home loan, buying an adequate amount of term insurance plan has many advantages over a home loan protection policy.
Ideally, the sum assured for your term plan for home loans should be equal to 10 times your annual income plus the amount of outstanding home loan.  For example, if your annual income is 7 lakh and the outstanding home loan amount is Rs. 30 lakh, your ideal term plan assured amount should be [7 lakh x 10 = 70 lakh + 30 lakh = 1 crore]. So, a home loan linked term plan with a sum assured of Rs. 1 crore will take care of all your family’s financial needs in your absence.
Home loan protection plan vs. Home loan linked term plan
You can choose to buy a home loan protection plan (HLPP) when you take a home loan from a financial institution. However, it’s not compulsory that you buy a home loan protection plan when you take a home loan. A term plan for home loan makes more sense and is a better option for homebuyers due to the following reasons:
- Premium for a HLPP is higher compared to a home loan term plan. A HLPP is a one-time premium amount that is included with the home loan while a home loan linked term plan premium can be paid in monthly, quarterly or yearly instalments.
- In case of a home loan protection plan, the coverage reduces in direct proportion to the outstanding loan. So, as the outstanding loan is paid off it reduces until it becomes zero after the loan is entirely paid off.
- In a home loan term plan, the coverage or death benefit remains the same during the entire term of the policy.
- You cannot increase the cover in a HLPP if you increase the tenure of the home loan through refinancing or balance transfer to another financial institution. There are no such hassles with a term plan.
Buying a term insurance plan to secure your family against the uncertainties of the future is a wise choice that you can make now. You can leave them a legacy to cherish instead of a financial burden with a Future Generali Flexi Online Term Plan which comes with options to choose between basic life cover, fixed income protection and increasing income protection.