If you’ve taken out a home loan and are wondering whether your existing term insurance is sufficient, consider this; you might have a term insurance policy worth Rs 1 crore, but if you later take a Rs 50-lakh home loan, if something happens to you, your family could end up using Rs 50 lakh from the insurance payout to repay the loan. This would leave them with just Rs 50 lakh for their future needs.
Yet, many borrowers assume that home loan insurance and term insurance offer the same level of protection, but that’s not the case. While both offer financial security, they serve very different purposes. Understanding the difference is crucial to ensure your family is well-protected when they need it the most.
So, here’s what every homeowner should know before assuming they’re already protected.
Home loan insurance vs term insurance: What’s the difference?
Home loan insurance is designed to repay the outstanding home loan if the borrower passes away during the policy term. Depending on the policy, it may also cover disability, ensuring that the borrower’s family does not inherit the housing loan burden.
Term insurance, on the other hand, is a pure life insurance plan that provides a fixed sum assured to the nominee if the insured passes away during the policy term. The nominee is free to use the payout for any financial need, including repaying the home loan.
The real difference between the two is intent.
“One is built to protect a specific liability, while the other is meant for overall financial protection. So, with a regular term plan, the money goes to your nominee. With a loan-linked policy, it often goes toward clearing the loan first,” says Sarvesh Kumar Mishra, Chief Third Party Distribution Officer, Generali Central Life Insurance.
“So suppose the insured has taken a home loan of Rs. 50 lakh and unfortunately passes away, leaving behind Rs. 35 lakh of outstanding loan amount, then that outstanding amount would be settled by the home loan insurance plan,” explains Santosh Sahoo – Vice President – SME Insurance, Probus.
Let us assume he had also opted for a term insurance policy of Rs. 1 crore while he was alive; in this case the nominee would also receive this complete amount which could be used by them in any future financial expenses, he adds.
The Rs 1-crore term insurance cover is generally intended to replace the deceased’s income and provide for the family’s household expenses and the children’s future financial needs. If the family has to use Rs 35 lakh from this amount to repay the outstanding home loan, it would be left with only Rs. 65 lakh. Can the family realistically meet its long-term financial needs with this reduced amount? Probably not.
Therefore, not opting for a separate home loan insurance cover could leave the family financially unprepared during a difficult time.
If you already have term insurance, do you still need home loan insurance?
In many cases, it may not be necessary. If the existing term insurance cover is sufficient to meet the family’s long-term financial needs as well as repay all outstanding liabilities, including the home loan, a separate home loan insurance policy may not add significant value.
However, it is important to periodically review the adequacy of the term cover.
“Many individuals purchase a term plan early in their careers and subsequently take on larger financial commitments such as a home loan. If the existing cover is no longer adequate after accounting for these liabilities, enhancing the term cover or considering a dedicated home loan protection plan could be appropriate,” says Venkatesh Naidu, Director, Insurance Brokers Association of India (IBAI).
Sahoo cautions against relying entirely on an existing term plan without reassessing the coverage.
For example, if someone has a Rs 1-crore term insurance policy and later takes an Rs 80-lakh home loan, the loan would consume most of the insurance proceeds, leaving the family with only Rs 20 lakh.
“That’s why we advise keeping liabilities separate. Either increase your main term cover or buy a dedicated loan protection policy so your house doesn’t swallow your family’s financial security,” he says.
