Friday, March 31, 2006

How do you protect your house if you die

Now that I got your attention with that title, I wanted to talk a little bit about the conventional wisdom of having an insurance plan that will cover the home loan. I wanted to talk about this when I saw an article on which is the best option for insurance in such an circumstance on the Should I pay off my insurance if I die

The article seems to explore the various insurance options available in the US for such an eventuality scenario - mortgage insurance vs. term insurance. In India I have not heard of mortgage insurance as an option. I know that Banks - to protect their loans from Natural calamity, make all borrowers sign up for a property insurance that will take care of any acts of God. I think the borrower - to protect the investment he/she has made over time should obtain varying covers to ensure that he/she can ensure that the property remains with loved ones if there is a sudden demise.

The problem is that home loans decrease over time since we tend to pay off the loan over time. How do we create an insurance plan whose sum assured also drops off over time? The solution is to take multiple insurance plans each with different timeframes. For example if your loan liability is 10Lakhs, your monthly EMI would be about 10,000 PM of which about 20% would be towards the principal and the rest towards the interest in the early years. Thus you can at best pay off about 2L at the end of five years, another 2 L after another 5 years and so on.

So the best bet is to take on multiple TERM insurance plans, each of 2L in value such that the first one expires after 5 years, the second after 10 and so on while the last one is for a period of your total loan. This will ensure that

  1. Your insurance payment liability drops off as your loan amount decreases

  2. You insure for the highest amount when you are young - when the premium tends to be lower

I didnt have this level of clarity when I took a term insurance for myself when I bought my home so today I have a large term insurance but my home liability has dropped over time. Hopefully you can plan your purchases better.


Razib Ahmed said...

You have touched a very important topic and the sad reality is that many people in South Asia (not just in India) neglect this matter. People here should be more aware about personal financae and insurence related matters.

Deepak Shenoy said...

There is at least one loan term assurance plan today, like this one:

But good point about the multiple term plans for a house.

Venkateswaran M said...

This is an interesting discusssion. But I would like to bring to your attention that there are term mortgage insurance policies available in the market. I have taken a term mortgage insurance policy for my Hsg loan with Bajaj Allianz for my hsg loan.