Mortgage Insurance – Do you really Need it?

March 10, 2011   ·   0 Comments

www.stockssavvy.comLesson 14: Mortgage Insurance

The only thing certain about life is that nothing about it is. Somebody may borrow to buy a house and be very diligent about paying the EMIs. But what if he meets with an untimely death? Not only does his family have to deal with the emotional loss, but also with the goons from collection agencies who will descend upon the family to collect the skipped EMIs. A cover equal to the value of the loan is essential to protect the future of his family.

Loan cover term assurance policies, as the plans are called, work like this: to protect a loan repayment schedule, they offer a cover that decreases as the value of the loan outstanding falls. The premium, however, remains the same for the entire duration of the cover. You can pay either a single premium or annual regular ones. If you take the regular premium plan, the premium paying term is only two-thirds of the policy term.

Sounds good, but we find that it is actually cheaper to buy a pure level term cover instead of this specialized product. The only difference is that you may be insured for more than the loan outstanding after a certain number of years.

With little difference in premium between the two, why not go for a higher cover with a pure level term? In the event of an untimely death, the outstanding home loan amount can be settled from the term plan and the balance term insurance amount remains with the family

Demystifying Home Loan Covers
The difference in premium outgo of loan cover and pure term plans is marginal. So go for pure term.
   Loan Cover Term Plan                  Pure Term Plan
Annual
premium option
Single
premium option
Annual
premium option
Single
premium option
Sum assured (Rs.) 20,00,000 20,00,000 20,00,000 20,00,000
Premium (Rs.) 8,630 44,260 5,590 51,720
Loan term (yrs) 15 15 15 15
Premium paying term (yrs.) 10 Once 15 Once
Total outgo (Rs) 86,300 44,260 83,850 51,720
Figures for HDFC Standard Life Insurance policies for a 30-year-old individual
If a Rs 20-lakh loan is being covered, the cover keeps going down as the loan instalments are paid off.

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Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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