Does anyone remember the Australian cricketer Merv Hughes from the 80s? The huge, colourful fast bowler with the huge mustache? Did you know that his mustache was such an important part of his image that he had it insured for A$370,000! It must have been a profitable bet for the insurance company because, as a quick Google image search shows, Hughes still has that mustache three decades later.
When I see how casually and thoroughly people insure themselves against all kinds of eventualities outside India, I can't help thinking that India lacks what I could call an 'insurance culture'. The world is uncertain and most of it will remain uncertain. However, we should try and eliminate as many uncertainties as possible by using insurance.
One such uncertainty is associated with home loans. These loans are taken for long, decade+ periods. Moreover, if the main earner of the family dies suddenly and survivors are unable to repay the loan, they would face a multi-faceted tragedy.
The solution is simple–term insurance. Whenever someone who has a home loan must not only take a term policy, but must incorporate the paying off of the home loan into the amount. Given how reasonably priced term policies are, this should be a no-brainer. For example, for a 35 year old healthy male, the cost of Rs 40 lakh cover for 25 years is around Rs 800 per month. The insurance premium shall be treated as an extension of the home loan EMI. Suppose, your home loan EMI is Rs 36,000 per month. Set aside Rs 800 more and consider the EMI to be Rs 36,800.
There's another solution that is sometimes recommended to loan-takers, which is a special kind of home loan repayment insurance policy that is designed exactly for this purpose. It works like a regular term plan with an added advantage of reducing cover. The life cover doesn't remain constant. It is linked with your home loan and reduces as the outstanding principal reduces on a monthly basis. However, when you examine the actual cost and details, a regular term insurance turns out to be the better choice.
Still, when you take a term insurance for the express purpose of protecting a home loan, you would do a couple of things differently. One, you would make an 'assignment' of the policy to the bank from where you have taken the loan. The assignment means that if an eventuality occurs in which the policy has to be paid out, it would be paid out to the assignee, that is, the loan would be directly paid off by the insurance company. However, if the loan is paid off normally, then the assignment can be terminated and the beneficiary of the policy during its remaining tenure can be any other nominee that you specify. There are also appropriate provisions in the assignment process to handle events like prepayment of the loan, or the transfer of the loan from one bank to another.
Another facility that one should be aware of is that the term insurance can have a provision whereby the loan can be repaid as continued EMIs instead of a lumpsum.
In any case, you would probably work out the details depending on your chosen home loan provider and insurance provider. Regardless of exact choices you make, the important thing is to ensure that the home loan is covered by an adequate term insurance.