Role of Term Insurance in Safeguarding Home Loans for the Self-Employed

The Role of Term Insurance in High-Risk Home Loans

Purchasing your dream home becomes a little easier when you can access home loans. However, it also brings the responsibility and often uncertainty of repayment, especially for high-risk home loans. In such a case, having term insurance can be a smart decision.

High-risk loans are typically those in which borrowers have a higher likelihood of defaulting on their payments. It may be due to other ongoing debts, the borrower's physical illness, a poor credit score, or other factors. So, in such a scenario, term insurance policies ensure your family does not have to bear the burden of a loan if you are no longer around.

This guide emphasises the significance of term insurance plans in high-risk home loans and highlights how they can serve as a lifesaver.

What are High-Risk Home Loans?

High-risk home loans are those in which the lender attempts to transfer some of the loan risk to the borrower. Due to several reasons, the applicant may be classified as a high-risk borrower, such as a poor credit score, past loan defaults, or a terminal illness, among others. Owing to these probabilities, the lender may charge higher interest rates or require larger down payments. These factors make it a high-risk home loan.

Benefits of Term Insurance for Home Loan Borrowers

A term insurance policy provides pure life insurance coverage. The nominee receives a tax-free death benefit (under Section 10(10D) of the Income Tax Act, 1961) if the life assured passes away during the policy tenure.

The benefit of term insurance can be a helpful tool in managing the outstanding home loan amount. How? Here we have explained:

Repayment of Outstanding Loan

A term insurance death benefit can be used to close the home loan that may otherwise take a toll on the finances of your family. A high-risk home loan may already have a higher interest rate. In such a case, if the borrower passes away, the entire burden of loan repayment shifts onto the family, making it quite difficult.

However, when the family receives sufficient term insurance coverage, they can cope not just with the home loan but also with various other ongoing financial expenses.

Protection for Home Ownership

If the borrower passes away before the home loan is completely repaid, the lender may attempt to recover the loan amount. In some cases, the lender may even seize the home for recovery or auction. So, not only do the family face financial and emotional turbulence, but they may even lose the much-needed home in this situation.

To ensure your family can retain ownership of the home without any hassle and pay the loan amount, a term insurance policy is a must.

Did you know the Married Women's Property Act (MWP), 1874, lets you secure the financial interest of your wife and children when applied to term insurance plans? Under the MWA Act, term insurance is deemed to be a trust. The benefit of the policy can only be used by the trustees (wife and children) and no one else, including relatives or creditors.

The Peace of Mind

Borrowing a high-risk loan can be a significant source of mental stress for many people. Due to a higher down payment or a higher interest rate, the burden of repayment is also higher. Amid such a situation, what most people want is a backup that they can rely on.

A term insurance policy could be the peace of mind you may be looking for. It ensures the financial security of your family, whether you are present or not.

Home Loan Insurance Vs Term Insurance

A question that may come to your mind is, why can't you simply buy a home loan insurance instead of term insurance? Well, that's a legit question, and here are some of the reasons why term insurance can be a better alternative:

Flexibility of Usage

A term insurance benefit is not limited to the home loan payments. You can use the death benefit amount for any purpose. It may be for medical treatments, payment of other debts, ongoing daily expenses, future financial goals, business, etc.

On the other hand, the home loan insurance is where the benefit funds can only be used to pay the loan. The policy benefit cannot be used for any other purpose.

Who is the Beneficiary?

In a term insurance plan, the beneficiary is the nominee stated in the policy documents. This means the nominee is eligible to use the amount as needed.

Unlike home loan insurance, the lender is not the beneficiary. In various home loan insurance policies, the insurance company directly settles the claim with the lender. So, the family of the insured individual does not receive the policy benefits directly.

Cost Per Amount of Coverage

When the cost per amount of coverage is considered, term insurance may turn out to be more affordable. Not only does it offer flexibility in benefit usage, but it is also very affordable. However, home loan insurance may be less expensive than a term plan in terms of premiums; the benefit is also limited to the loan repayment.

Option of Customization

A term insurance policy is a pure life cover. However, some insurance providers may offer you the option of riders, such as terminal illness coverage, accident coverage, or term return of premium. These options may not be available with a home loan insurance.

Along with these, you can also claim tax deductions up to ₹1.5 lakhs under Section 80C of the Income Tax Act of 1961. Additionally, the death benefit is also tax-free under Section 10 (10D) of the Income Tax Act of 1961.

End Note

Term insurance can be a powerful tool in managing finances, especially when the family's primary earner is no longer present. It provides the flexibility of managing multiple financial needs under a single policy, such as a home loan, other debts, and ongoing expenses.

A home loan repayment can be a huge burden on the family. Secure their financial interests today with not just a home but also a term insurance policy. At Jio Insurance Broking, you can easily compare various plans to choose the most suitable one for your loved ones.