Relieved that your home loan has been approved? Spare a thought for uncertainties too. If you want to protect your family from the burden of repaying the loan in the event of your death, consider taking an insurance cover.

The easiest and most convenient option, no doubt, is to sign up for a home loan insurance plan offered by the lending company or bank. What such plans do is to insure the borrower’s life. In case of death, the dependants receive a lumpsum which can used to repay the loan. You can opt for this at the time of applying for the loan.

Some banks offer a one-time premium plan and the cover is linked to the outstanding loan amount, which reduces as your dues shrink over the years. Alternatively, some banks collect the premium in instalments spread over a few years.

Axis Bank charges a one-time premium for home loan insurance. This can be paid either by the customer or funded by the bank. In the latter case, the amount you owe as premium adds to your EMI.

For example, a 35-year-old can get an insurance cover for a ₹35-lakh home loan (20-year period) by paying a one-time premium of ₹90,878. However, while opting for home loan insurance with an upfront payment of premium may be a convenient choice, it isn’t the most economical one. An instalment plan can work out cheaper.

How they compare However, a pure term life insurance plan bought online from an insurer is perhaps even better in terms of cost.

To help you understand this better, here’s a comparison of the costs and benefits. First let’s consider the upfront premium versus instalments in case of a home loan insurance plan. An SBI home loan borrower can choose between the bank’s RiNn Raksha plan and the Smart Shield plan, both offered in collaboration with SBI Life. Under the RiNn Raksha plan, a customer gets covered for the outstanding loan amount for the entire loan period. If the borrower so requires, the banks also give a loan to help you pay the premium. A 35-year-old individual would be charged a premium of ₹1,15,315 (to be paid in five equal instalments).

Under the Smart Shield plan, which has to be renewed annually, the borrower is free to decide on the cover amount.

Assuming a person decides to take cover for ₹35 lakh, the annual premium comes to ₹8,372.

Time value On the face of it, the Smart Shield plan seems more expensive.

The total premium paid, that is, ₹1,67,440 (₹8,372x20) under this plan exceeds the ₹1,15,315 to be paid in case of the RiNn Raksha plan. But this doesn’t take into account the time value of money. So, let’s calculate the present value of money paid as premiums to compare the cost of insurance under the two plans.

Assuming a discount rate of 6.5 per cent, the present value of the premium paid under RiNn Raksha would be ₹1,02,072 as against ₹98,243 in case of Smart Shield. The gap between the two would only widen, at a higher discount rate. Moreover, the cover under RiNn Raksha reduces as you age, while that under Smart Shield stays fixed.

Likewise, skipping the home loan insurance plans and taking a pure term insurance can be a cheaper alternative.

You can buy a 20-year online term policy from LIC for a fixed sum assured of ₹35 lakh for an annual premium of ₹7,216 (including tax) the first year and ₹7123 for the remaining 19 years.

Again assuming a discount rate of 6.5 per cent, the present value of all the premiums taken together would be ₹83,674, much lower when compared with most loan protection plans from banks. A similar basic life cover (online plan) with Max Life Insurance would come for an annual premium of ₹5,865, which compares even more favourably.

Therefore, if you’re taking a home loan, do take a term life insurance cover for it.

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