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Loan Insurance for Entire Loan or Not? - A Home Buyer's Dilemma

Ramalingam Kalirajan |7606 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Aug 23, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Aug 17, 2024Hindi

I am going to have a home loan of 12 lakh Lender has suggest for a loan insurance for the entire tenure, means in case of my death all loan will be paid by the insurance company. I want to ask is there any alternative of this type of insurance ?? Please suggest.

Ans: Loan insurance protects your family from the burden of repaying your loan if something happens to you. It's designed to ensure that your home loan gets paid off in the event of your death. However, it’s crucial to assess whether this specific insurance is the best option for you.

Loan insurance is typically offered by lenders and may seem convenient. However, it's essential to consider alternatives that might offer better coverage or more flexibility.

Consider Term Insurance as an Alternative
A term insurance policy is one of the best alternatives to loan insurance. Here's why:

Cost-Effective: Term insurance often costs less than loan insurance. You get a higher cover for a lower premium.

Comprehensive Coverage: Term insurance isn't tied to your loan amount. It provides a lump sum to your family, which they can use to pay off the loan and meet other financial needs.

Flexibility: With term insurance, you have the flexibility to choose the coverage amount. It's not limited to just covering your loan. You can cover your entire family's future needs.

Benefits of a Term Insurance Policy
Higher Coverage: You can choose a sum assured that covers your entire financial responsibility, not just the loan.

Separate from the Loan: Your family can use the payout for any purpose, not just repaying the loan.

Longer Tenure: Term insurance can cover you for a longer period, not just for the tenure of the loan.

Drawbacks of Loan Insurance
Declining Coverage: Loan insurance usually offers declining coverage. As your loan balance decreases, so does the coverage amount.

Tied to the Loan: The insurance is tied to your loan. You can't use it for other financial needs.

Cost: It might be more expensive than a term plan offering the same cover.

Final Insights
Choosing between loan insurance and term insurance is crucial. Loan insurance is convenient but might not offer the best value. A term insurance plan gives more comprehensive coverage at a lower cost. It's wise to assess your family's needs and choose the option that offers the best protection.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.