July 8, 2002 | 1610 IST
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Money > Business Headlines > Special July 8, 2002 | 1610 IST |
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How to cover your home loanRajesh Nair
So its only natural that once that handsome cheque from the housing finance company arrives, you can stop twiddling your thumbs and heave a sigh of relief. But does this mean that you can live happily ever after? No way. Because life is, rarely, if ever, a bed of roses. Have you thought, even fleetingly, about insuring that enormous loan that you will be working towards repaying every month for probably the next twenty years of your life? No? Big mistake. Life can be so very unpredictable, you know. There can be sudden and unforeseen accidents. God forbid, if you were to get involved in an accident that left you disabled, either partially or completely, the financial ramifications it will bear on your future could be colossal. It assumes even higher significance in case you are the sole earner in the family, and just beginning to repay a huge financial liability -- a housing loan, in this case. That's why practically nearly every housing finance company in the business insists on the borrower to insure himself through a personal accident insurance policy or a comprehensive life insurance policy, with the insured amount, obviously, matching the loan amount. What's more, many loan providers also insist that the borrower insure the house against fire and allied dangers under the "householders insurance policy". Clearly, it makes perfect sense for any borrower to cover his loan, as in the unfortunate event of his death, the insurance company will compensate the housing finance company for the borrower. In case there is no cover, the bank will be compelled to make good the dues from the co-applicant or guarantor, or by selling off the property. In the case of a sole bread-winner, the situation can turn even more grave if the bank has to dispose off the property to recover its dues, as it means leaving the rest of the hapless family in the lurch. With most large financial institutions now transforming themselves into "one-stop shops" for all your financial services requirements, things have turned easier. For instance, you could walk into ICICI for your home loan, and also avail of life insurance from ICICI Prudential and a householders insurance policy from ICICI Lombard. Similarly, while HDFC can offer you a housing loan, HDFC Standard Life can provide the life cover. It's the same with LIC Housing Finance; the company can provide you housing loans, while LIC can offer insurance cover. Incidentally, though the major housing finance companies have other group companies with interests in insurance, none of them have tailor-made life insurance solutions specifically meant for individual home loan seekers. Interestingly, in case you already have a life insurance policy (which, apparently is the case with most people), it can be used as a collateral for your loan. For instance, if you have a life insurance policy for a sum assured of Rs 300,000 and you avail of a housing loan to the tune of Rs 700,000, the housing finance company would recommend a loan cover of not more than Rs 400,000. In the case of LIC Housing Finance, the company insists on the borrower taking a life insurance cover to the extent of the loan amount. This policy is endorsed in the company's name during the tenure of the loan. In case a borrower does not wish to cover the loan with a life insurance policy, the company charges an additional 0.25 per cent interest on the rate(fixed or floating) chosen. However, many others like HDFC and ICICI do not slap any additional charge on the interest rate in case the borrower decides not to go in for an insurance cover. In the case of ICICI, the company provides borrowers with a "free" personal accident insurance and a householders insurance policy to the extent of the loan amount. While this might seem to be the most enticing of the lot at first glance, the "free" offer is not really what it's made out to be. The company charges a one per cent processing fee, which apparently, covers for your premium payment. Ideally, if you have huge debts like house loans, term plans may be the best option. Term plans are usually available for five years to 30 years tenure and usually in multiples of five. What's more, you can buy a term plan for an equivalent tenure and amount as the house loan. Unlike other products like the endowment policy, money-back policy and whole-life plan which also serve as saving instruments, term plans are purely meant for life insurance. Most plans offer no survival benefits. In case death occurs, the sum assured is paid to the beneficiary. And since they charge only for the risk, they are also the cheapest insurance plans. Let's consider a typical case. If you are 30 years old, and has a house loan of Rs 1 billion for a tenure of 20 years, you can avail of the 'Bima Kiran' term assurance plan for the same amount and tenure from LIC. The yearly premium works to Rs 11,477. You can also make half-yearly payments. So, anytime during the tenure of your home loan, in case there is an unfortunate event which will render you incapable of repayment, the housing finance company can be compensated by LIC. What's more, you also get the entire cumulative premium paid during the tenure of the policy, at expiry. Besides, you also have tax rebate(20 or 15 per cent depending on the income bracket you belong to) on the premium paid on a yearly basis. Some of the major names that offer term assurance plans include, LIC, ICICI Prudential, Max New York Life, Birla Sun Life, Tata AIG, etc. So go ahead, take your pick, get your loan insured, and get ready to live happily for the rest of your life. Powered by ALSO READ:
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From the time you decide to have a home of your own to zeroing-in on that perfectly located apartment and getting that home loan sanctioned, it's a long and fidgety wait.
