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Buying life insurance is an important part of financial planning. It is always advised that one should buy a cover which will be enough to take care of all the liabilities and goals of the person. However, if you have added a liability it is important that you update your life insurance cover along with it. So, if you have bought a house using a home loan, it is important that you cover the liability with an insurance equivalent to the loan amount.
Now there are two options here. One, there is a simple term plan which you can buy and second is the loan protection plans offered by the banks when you avail a home loan.
Under loan protection plans the sum assured reduces with the loan amount so that in case of premature death the outstanding loan amount can be paid to the bank. The tenure of the policy is the same as the loan. While in case of a standard term life insurance the sum assured remains constant and you may opt for a higher tenure than the loan amount. In case of a simple term plan the sum assured is paid to the family in case of untimely death of the person. They can pay the bank an amount equivalent to the outstanding loan amount.
In case of loan protection plans the insurance company pays directly to the bank. In case a person has term insurance to take care of other liabilities, one can go for loan protection plans as they are cheaper, say experts. “If protection is to cover home loan, then one should buy loan protection plans as sum assured decreases adjusted to outstanding loan. In case of term life insurance, sum assured is fixed throughout the term. Therefore, they cost more than home loan protection plans," said Basavaraj Tonagatti, a Sebi-registered financial adviser. For your property, you should buy a home insurance policy. Such a policy would cover any material damage to your house. Damages could be caused by a list of named perils including fire, earthquake, and storm. Sum assured would be the reconstruction cost of the house.
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