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News & Views

Thursday, Feb 15, 2018

If you have a loan, you cannot miss having a term plan

[Source : The Economic Times]

Money can buy you many things including a car, a house, and your dream holiday. But if you are someone who takes loans to fulfil your dreams, you need something extra to complete your bucket list.

A loan can get you and your loved ones the comfort of a car and security of a home, and many other things. However, your real responsibility begins only after taking the loan. You can repay the loan till you are alive and working. But have you given a thought about what your family would do in case something unfortunate happens to you before you repay the loans?

To ensure that the equated monthly instalments (EMIs) are paid on time, you need a backup plan to take care of your liabilities when you are not around – for this, you need an equivalent insurance cover against the loan. A term insurance plan can be the ideal solution in such a situation. A term insurance plan is a type of life cover which provides security to your family in case of an unfortunate event at just a nominal cost.

You can get an extensive cover of Rs 1 crore at an approximate premium of up to Rs 12,000 for a year. However, the premium amount will depend on the policyholder’s age and lifestyle. Smokers have to shell out more for the same amount of insurance cover.

A wise man always saves for a rainy day. But a wiser man ensures that the savings reach the desired people and are used in the manner he had planned while he was alive. A term insurance plan can ensure that all your EMIs and other financial needs are taken care even in your absence.

When you buy a term insurance plan, it comes with the option of receiving the sum assured (death benefit) either as a lump sum (one-time) amount or in the form of staggered payouts (regular income). In case of a one-time payout, the nominee gets the entire amount in one-go and the insurance contract is complete. But in case of a staggered payout, the claim amount is paid in parts over the course of many years. It acts as an income replacement for the policyholder's family.

The way you decide upon the loan – home, personal, or car - according to your need, you can choose the type of payout that suits you.

Payout options to choose from:

- Lump sum (one-time)

- Monthly income (fixed amount)

- Increasing monthly income

- Lump sum + regular income

If buying a term plan is the first step to secure your family’s future, choosing the right payout option is the next step.

If you have a home loan

Securing your home loan with an insurance cover is as important as paying the EMIs on time. If the loan amount is high, you should opt for a lump sum payout.

Additionally, you should also opt for a critical illness cover. This is because it will act as a backup if a critical illness like diabetes or cancer strikes unexpectedly. Ideally, an amount of Rs 20-30 lakh can be taken as a critical illness cover.

If you have an education loan

As the loan and EMI amount are comparatively smaller than a home loan, you can opt for monthly income option which will help your family pay the EMIs regularly without taking in account their monthly budgets.

If you use a bike to commute to work, it’s best to opt for an accidental death benefit rider with this.

If you have a personal loan

Personal loans usually have a smaller repayment tenure. Based on the amount and the duration of the loan you can decide which payout options suits best.

An additional critical illness cover should be taken in this case because personal loans come with high interest rates and if a critical illness strikes and one is out of work, the outstanding will keep accruing at a high rate of interest. Ideal amount of critical illness cover to be taken is around Rs 20-30 lakh.

If you have a car/bike loan

Bike loans are smaller than car loans, so you can choose regular income payouts to cover the EMIs. For car loans, which are slightly higher than two-wheeler loans, you can choose a combination of lump sum + regular income payout. In this case, 30-50 percent of the sum assured as lump sum could be good enough.

If you are a travel using a bike, you should definitely choose an accidental death benefit rider. This will pay out an amount over and above the life cover so that your loan is covered and your family will still have money left over after paying off your bike/car loans.

Mortgage Insurance Plan

Mortgage insurance also called as home loan protection Plan is a dedicated home loan product. This policy covers the loss against non-payment of EMIs in case of borrower’s unfortunate death. There are some policies which come with riders of accidental death, disability, critical illness and job loss (with a maximum of 3 EMIs).

Mortgage title insurance plans are usually single premium policies. But some variants for regular and limited premium payment terms are also available. In single premium payment plans, banks allow the borrower to bundle the premium amount with the loan amount.

Mortgage insurance versus term plan

Mortgage insurance plans are usually clubbed with home loans taken from banks and are not as popular as term plans. Unlike term insurance plans, this is a contract between the bank and the insurance company. At the time of claim, the insurer settles the outstanding loan with the bank on behalf of the policyholder.

These plans are more expensive than pure term plans due to huge percentile of surrender value of the remaining premium for single or limited premium payment plans.

Also, mortgage insurance plans cannot be ported to other lenders as they are under the master policy between the lender and the insurance company.

Mortgage insurance is not compulsory by law though banks normally insist on buying it while applying for a loan. You should use your discretion before purchasing the Home Loan Protection Plan.

A basic term policy with equivalent amount of sum assured is a more prudent and cost effective way to secure the loan.

Married Women’s Property Act

Irrespective of the type of loan, if you are married, you should take a term insurance under MWP Act. It ensures that no unlawful claims are made to the claim amount by creditors. It is easy to do and can be done online on the insurer’s website. The MWP Act was introduced to protect the properties owned by women from relatives, creditors and even from their own husbands, in case of a court or any income tax department attachment.

MWP Act ensures that the claim benefit is passed on to the policy beneficiaries and trustees. Banks and creditors cannot attach the life insurance proceeds under the MWP Act.

Also, the choice of payout option will determine the future of your loved ones. In your absence, your family will be able to meet their daily expenses and repay the loan and at the same time manage their future expenses with the lump sum amount. Go for it if you have the confidence that the nominee will be able to handle the huge sum of money disbursed, else opt for staggered payouts.

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