Without access to loans, none of us can think of buying a house, a car or even starting up a small business. But what would happen in case of an untimely death or loss of employment due to disability? In such a scenario the onus of repayment would fall on our family. To the rescue, in such situations, come mortgage insurance policies. These insurance policies secure your debt and prevent the loss of your asset that may occur due to non repayment of the loan amount.
A mortgage insurance plan or loan protection plan protects your loan by repaying the outstanding loan amount in case of any death or disability. It ensures your family does not face the burden of repaying an outstanding loan in your absence. Though most commonly used to protect a home loan, many insurers these days also offer such plans to protect car loans.
How It Works
A mortgage insurance plan is typically a term insurance plan. The tenure of the plan is linked with the repayment schedule of your loan, and the amount of life cover is associated with the outstanding loan amount. In case of death of the insured, the policy settles any outstanding loan amount directly to the lender or the bank. Thus, your family does not have the tension of fulfilling loan obligations, and nor is there a risk of loss of asset due to non repayment of monthly loan installments. So, unlike a regular term plan, mortgage insurance settles the claim with the bank or lender to close the loan on your behalf.
Key Features of the Plan
- Decreasing Sum Assured: The plan works on the principle of decreasing sum assured. It offers protection only on the amount of loan outstanding. As your loan gets paid every month through an EMI, the sum assured decreases up to the loan amount that is outstanding. Your premium too reduces proportionately with your decreasing sum assured. So you actually pay only for the protection that is needed.
- Premiums could be included with loan EMIs: The policy premium could be included along with your monthly EMI, providing ease and convenience in making payments.
- Additional covers available: A few insurers offer additional cover against permanent disability due to critical illness or accidents, or loss of employment due to disability.
- Option of regular as well as single premium policies.
- Premature closure of loan: If you desire to repay your loan, the policy ceases to exist. In such a case, any premium paid would not be refunded.
- Offers tax benefits: The premium paid is eligible for tax deduction under Section 80C.
What to Watch Out For
- The single premium option: Opting for a single premium policy may sure seem convenient. But bear in mind that if you at anytime decide to prepay your loan, the advance premium that has been paid would not be refunded back.
- Increase in loan tenure: Suppose you opt to increase the tenure of the loan, due to an increase in loan interest rates. In such a scenario, the mortgage plan may fail to provide an adequate cover. This is because though the sum assured reduces in accordance with your loan amortization schedule, a larger portion of the principal still remains outstanding. The principal outstanding reduces at a much slower pace. Furthermore, your premium and sum assured depend on other factors such as credit history, age, and medical conditions.
- Combining premiums with EMIs: In cases where the EMI’s and premiums are clubbed together, tax benefits under section 80 C would not be applicable.
Should You Consider The Plan?
Having loans does expose you to the risk of not being able to fulfill the required obligations. An extra bit of expense secures your debt and gives you and your family the peace of mind that the asset would remain with you. If you have a high value and a long term debt, it is strongly advised to opt for a mortage protection plan. On the other hand, if you already possess sufficient term insurance or life cover, check to see if an additional plan would actually be required. Your family should be able to repay all debts as well as lead their lives ahead, in case anything were to happen to you.
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal