What is a Term Insurance Plan for a Home Loan?
A plan for a home loan is a policy specifically designed to cover your outstanding home loan in case of your untimely death. Should this happen during the loan tenure, the insurance payout helps your family repay the remaining loan amount. Term insurance for home loan protection ensures they do not face financial distress or risk losing their home due to a loan default.
While not mandatory, such a plan acts as a safety net as it offers a high sum assured. You must choose a coverage amount that matches your loan and keep the premiums within your budget.
Benefits of Buying Term Insurance for a Home Loan
You must prepare for the financial uncertainties that any family can potentially face. A home loan is a significant long-term liability that absolutely requires its own protection. The benefits of term insurance are designed for this exact scenario. The home loan protection insurance provides significant financial relief. A life insurance for home loan is an affordable solution that delivers the following key advantages:
Financial Security for Your Family
If something happens to you, your family will not be forced to dip into their savings or sell assets to pay off the home loan. The insurance payout is designed to clear the remaining loan on time, which allows them to keep the house.
Affordable Premiums
Term insurance provides an extremely cost-effective method for securing a very large home loan amount. The fixed policy term means you get access to much lower premiums than other insurance options, which is a highly practical benefit.
Flexible Coverage Options
You can choose a sum assured that matches your loan amount and opt for decreasing cover plans, where the coverage reduces as the loan is repaid. You can also add additional riders to enhance the plan’s coverage.
Tax Benefits
Your paid premiums qualify for tax deductions under Section 80C of the Income Tax Act and directly lower your overall taxable income. The death benefit payout received by your nominee is also designated as completely tax-free under the rules of Section 10(10D).
Peace of Mind
A secured home loan delivers long-term financial stability directly to your family. They are able to continue their lives in the home without the immense pressure of mortgage debt or any related financial strain.
How Do Term Insurance Plans Cover Home Loan Risks?
Term insurance plans function as a crucial financial safeguard against home loan risks. Should the policyholder’s death occur during the loan tenure, the insurance benefit is paid out to clear the outstanding loan balance. Your nominee can receive this payout as a single lump sum or through a structured series of periodic installments. A substantial policy, for instance, a ₹1 crore term insurance plan, delivers a sum large enough to clear significant mortgage debt and also address other family financial needs. The loan is therefore settled completely and efficiently.
For example, suppose Amit takes a ₹50 lakh home loan for 20 years and also buys a term insurance policy of the same amount. If he unexpectedly passes away after 10 years, when his outstanding loan is ₹30 lakh, his family uses the insurance payout to repay the remaining loan. This action removes the burden of loan EMIs, and his family continues living in the house without any financial stress.
Why Term Plan is the Best Choice in Paying off Home Loan?
Now that we have answered ‘What are term plans’ and ‘How do home loan help you?’, let us look at why we should choose them in combination:
Term insurance offers premiums that are more affordable with higher coverage. A term plan tied to a house loan typically features a mechanism where the cover lowers as the loan is paid off and is intended so that the cover is zero by the end of the term, leaving no balance. In a term life insurance policy, the sum assured remains the same. Therefore, we get the balance amount after the payment of the home loan as well, which can be used to meet other needs.
The best home loan insurance policy in India ensures the most significant financial security for us and our loved ones, so choosing a suitable one becomes essential to making our dreams of having the ideal home come true.
So, now you know what a term plan is and what its significance is for home loans. Whenever you are investing in home loan term insurance, you can secure the home loan by correctly calculating the amount of the sum assured that may be needed. To ensure this, it is recommended that they opt for the best home loan protection plan with coverage of at least 10-15 times their annual income and add to it the amount of the home loan.
Tax Benefits of Home Loan and Term Insurance
Pairing your home loan with a term insurance policy unlocks significant tax-saving advantages under multiple sections of the Income Tax Act. The provisions within the act exist to lower your overall tax liability.
- Section 80C: This allows you to claim a combined deduction that can reach up to ₹1.5 lakh each financial year. This limit applies to the life insurance premiums you pay and the principal portion of your home loan repayment.
- Section 24(b): You can claim a separate deduction for the interest paid on your home loan. For a self-occupied property, this deduction is capped at ₹2 lakh per year, offering substantial relief.
- Section 80EEA: First-time homebuyers get access to an additional tax benefit through this section. It grants a further deduction of up to ₹1.5 lakh on home loan interest, provided the property’s value is ₹45 lakh or less.
These deductions directly reduce your taxable income and simplify the management of your home loan and insurance premium payments. Please note that all tax benefits are governed by the prevailing tax laws at the time, and availability may depend on whether you follow the old or new tax regime.
Steps to Secure Your Home Loan with Term Insurance
You must be deliberate when selecting a term insurance plan to cover your home loan.
Step 1: Define Your Total Coverage Requirement
A complete evaluation of your home loan, living expenses, and future goals is mandatory to establish the proper sum assured for your policy. This detailed assessment creates a financial safety net that is accurately sized for all potential needs.
Step 2: Verify the Final Sum Assured
You should confirm your required coverage amount by consulting a financial expert or by using an online term insurance calculator. The final sum assured will be sufficient to eliminate the entire home loan and also guarantee your family’s long-term financial stability.
Step 3: Enhance Your Policy with Riders
The right riders add critical layers of protection to your base policy. A critical illness rider gives you a lump sum payout to handle medical costs, which protects your personal savings. A waiver of premium rider ensures your policy stays active if a severe illness or disability prevents you from making payments.
A term insurance plan for your home loan is an essential component of sound financial planning. It is the single most effective strategy to clear your largest debt and deliver critical financial security to your family. The right plan provides true flexibility, strong rider protection, and important tax advantages, forming a key part of your financial legacy.
FAQs on Term Insurance for Home Loan
1
Why should I buy term insurance for my home loan?
You should buy term insurance to guarantee your family can keep their home without any financial strain. The policy pays off your entire outstanding mortgage if you are no longer there to do so, protecting them from a massive debt.
2
How does term insurance help in protecting my home loan?
In the event of your death during the policy term, the insurance plan pays out the sum assured to your nominee. This money is then used to completely settle the outstanding home loan balance with the lender, effectively eliminating the debt.
3
Is it mandatory to have term insurance for a home loan?
No, there is no legal mandate that requires you to have term insurance for a home loan. However, most lending institutions will strongly recommend or even require it as a prerequisite for approving your loan application to secure their financial risk.
4
What is the difference between regular term insurance and home loan protection insurance?
A regular term insurance policy offers a fixed, level sum assured that does not change throughout the entire policy duration. In contrast, home loan protection plans are typically decreasing term policies, where the coverage amount reduces over time in sync with your decreasing loan balance.
5
Can I use an existing term insurance policy for covering my home loan?
Yes, you can use an existing term insurance policy for your home loan. You must first verify that the current sum assured is high enough to cover the entire home loan amount while also leaving sufficient funds for your family’s other financial needs.
6
How is the sum assured decided in a home loan term insurance plan?
The sum assured for a term plan covering a home loan should always be at least equal to the full principal amount of your loan. It is often recommended to select a sum assured that is slightly higher to also account for interest and other unforeseen expenses.
