Purchasing a home is a major financial commitment and, for most people, an important life milestone. However, to achieve this milestone, many people often take out a massive amount of home loan. While the house, on the one hand becomes a valuable asset, the loan becomes a long term financial liability that may continue for 15, 20 or even 30 years.
To protect your family from this financial burden, a term life insurance plan can play an important role in your financial plan.
What Will Happen to Your Home Loan if You Die?
In the unfortunate event of the borrower’s death, and the home loan is still active, the burden of the outstanding balance automatically falls on their family. If there is a co-borrower for example, a spouse, the surviving co-borrower may continue to make the loan payments. In other cases, the legal heirs may be faced with the outstanding liability.
This can become difficult for a family that depends on the borrower’s income to pay the EMI every month. Besides the home loan, the family has to manage day-to-day expenses, children’s education and other financial commitments.
A family that once lived happily in their dream house may have to face financial hardships to pay the outstanding EMIs. And in case the family fails to make the repayments, the lender may initiate action to recover the outstanding dues under the terms of the loan agreement and applicable laws.
Why Is Term Insurance Important After Taking a Home Loan?
Given life’s uncertainty, having a term insurance plan has become an important part of financial planning. A term life insurance policy can provide financial support to the family if the policyholder dies during the policy term. The death benefit is paid to the nominee and can be used to meet the family’s financial needs.
To protect your loved ones from financial instability, term insurance becomes more important when you have big financial liabilities like a home loan.
For instance, a person has taken a home loan of Rs 50 lakh and dies with a large portion of the loan still pending. The family will have to fight to raise the money to pay the outstanding loan. The term insurance policy proceeds will help the family deal with this liability without having to sell the house or use up their savings immediately.
Term insurance benefit is not limited to home loan only. The family may also need money for regular household expenses, children’s education, other loans and future financial needs.
How Much Term Insurance Cover Do You Need With a Home Loan?
There is no fixed amount of life cover that is suitable for every home loan borrower. The outstanding loan is an important factor, but you should also consider the below mentioned factors:
- Daily household expenses
- Other loans and financial liabilities
- Children’s education and other future goals
- Number of financial dependants
- Existing savings and investments
- Remaining home loan tenure
The aim should be to leave the family with enough financial support to deal with the home loan as well as other expenses after the loss of the primary earning member. When looking for the best term insurance plan, borrowers should consider the outstanding home loan, existing financial liabilities, income, dependents, and future financial goals rather than choosing a policy based only on the premium.
Should Your Term Insurance Cover the Entire Home Loan Tenure?
The policy term is another factor worth considering when you take a home loan. If your home loan is scheduled to continue for 20 years, you may want to review whether your life insurance cover will remain active during this period.
This does not mean that the insurance policy must always have exactly the same tenure as the home loan. Your age, income, retirement plans, dependents, and other financial responsibilities also need to be considered.
The important point is to avoid a situation where a major home loan is still outstanding but your life insurance cover has already ended.
Review Your Life Insurance After Taking a Home Loan
Taking a home loan can significantly change your financial responsibilities. If you already have a life insurance policy, it is worth reviewing the cover after taking the loan.
Ask yourself:
- How much life cover do I currently have?
- How much is still outstanding on the home loan?
- How many years are left on the loan?
- Who depends on my income?
- Do I have any other loans?
- How much savings and investment can my family access?
- Would my family be able to manage the home loan if my income stopped?
The answers can help you understand whether your existing cover is sufficient or needs to be reconsidered.
Bottom Line
A home loan can help you buy a house, but it also comes with a financial obligation that can last for many years. If the primary borrower dies before the loan is paid off, the family may have to deal with the remaining loan along with their day to day expenses. In such a situation, term insurance can help the nominee financially. Depending on the family’s situation, the cover can be utilised to manage the home loan and other financial requirements.
So, when you get a home loan, it is a good time to review your life insurance cover and ensure it aligns with your current financial responsibilities.
