Loan Insurance versus Term Insurance

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Hello, Have you availed home loan from a bank..? Or have a home loan plan? Friends, my name is Loganathan .. I am a financial advisor. For a middle class family like ours, owning a home is a lifelong dream. But not all of us are sure if we have enough savings to buy that house. OK When to buy a house? If you join a job at the age of 25, it is better to buy a house beore your 40 or at the most 45. Let's get to the home loan. Suppose Vinoth buys a house at his 40. In cities like Chennai and Coimbatore, even if you want to buy a 1000 sq ft flat in the suburbs, it can cost around 50 to 60 lakhs. OK .. now If you take a loan of Rs 50 lakh, the EMI comes about Rs 40,000 / - for 20 years pepayment term at 7% interest rate. Now, the bank will ask you to take out a home loan insurance for this 50 lakh loan. Because in case something unfortunate happens to Vinoth, the bank will be able to pay off the remaining bank loan on that date with the insurance money and hand over the house to Vinoth's family. The loan will be closed for the bank. Vinoth's dream house will be available to his family. Well, you may be confused as to how to mobilise funds for this home insurance.. The bank will come to the rescue and tell you, 'Don't worry .. we will add this amount also to your home loan and you pay the EMI along with this. It may sound good to you that the risk is covered with this home loan insurance. But Do You Need This Loan Insurance? Is this the only way? I will say no to this loan insurance as a better solution than this is available. Lets see. Loan insurance single premium for a loan of Rs 50 lakh can come to Rs 2 lakh. The interest for 20 years could be another Rs 2 lakh. So, this Rs 4 lakh is added to the loan of Rs 50 lakh payable in EMI for 20 years. Let us take the repayment of loan insurance component alone here. For the loan insurance of 4.00 lacs alone you need to pay Rs. 20000 / - per annum. (400000 ÷20 years) Here are some disadvantages of loan insurance : 1. The total premium for this loan insurance should be paid lump sum at the beginning itself. 2. This insurance works on the reduced balance of the home loan. There is no fixed amount. 3. When the loan amount is increased by top up, you will have to take another loan insurance for that amount. 4. The remaining propotionate premium will not be refunded when the loan is reduced or pre-closed. 5. This insurance is not portable -  if the loan is transferred to another bank due to change in interest rate or for any other reasons this loan insurance will not continue and you need to take a fresh loan insurance for the total loan amount again. 6. When the loan period is increased from 20 to 25 years, the insurance for those 5 years will not be available. Again another loan insurance to be taken for these 5 years. 7. In case of any mishap, the bank will pay off the remaining home loan through loan insurance and hand over the house to his family. Vinoth's family will not get any other money through this loan insurance. So what is the alternative? Let's see it now. The best alternative is term insurance instead of loan insurance. For a loan of Rs 50 lakh, Vinoth pays Rs. 20,000/- per annum for 20 years towards loan insurance premium. For the same 20 years, the amount required to take a 50 lakh term insurance for Vinoth's age is only 12000/- per year.  For 1.00 crore term insurance Vinoth has to pay Rs 20,000/ only as annual premium. What we see here is, with the 20000/ loan insurance premium for 50 lakh reducing balance loan, we can get a term insurance of 1.00 crore. Which is beneficial..? Now let's look at the benefits of term insurance. 1. Very low and fixed premium 2. Higher insurance amount .. 3. Fixed sum assured. 4. The same premium throughout the insurance period. 5. Term insurance premium is definitely lower than home loan insurance premium. If anything untoward happens to Vinoth in the interim, the balance will go to the family will get the remaining amout of the term insurance claim after closure of the loan. The house will now be owned by the family. For example, if the loan balance is Rs 25 lakh, the family will get the remaining Rs 25 lakh with the house.  If that the term insurance is for one crore, the family will get 75 lakhs to continue to sustain the current life style. When you buy a term insurance it is better to take additional 5 year period as well as a higher amount. If you say you have term insurance, the bank will not force you to take out loan insurance. Isn't it clear now that buying term insurance is better in many ways than loan insurance? Please buy term insurance right now. Every one of you will be planning to buy a house for you. So take out term insurance within a year or two of joining the job. The premium is very, very low when taken under 30 years of age. Enjoy Fixed premium for the entire period. Thanks. R Loganathan. 9444384810
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