7 Reasons Why a Home Loan Protection Plan is Not a Good Decision
A Home Loan is a long term financial commitment, which requires you to pay anywhere between 120 to 360 EMIs, each of which may cost up to 40% of your monthly earnings. Of course, if something were to happen to you, you wouldn’t want the burden of this incredible financial commitment to fall on the shoulders of your loved ones. It is for this very reason that products like Home Loan Protection Plan and Term Insurance Plans are available in the market. These products ensure that your Home Loan repayment is taken care of, in case of any mishap.
However, before you blindly Opt for a Home Loan Protection Plan suggested by your bank, make sure that you understand some inherent loopholes that this product entails.
1. Home Loan Protection Plan is Expensive
More often than not, the premium that you need to pay towards a Home Loan Protection Plan is exceptional to that of Term Insurance Plans. For instance, if you are willing to take a plan of Rs. 30 lakh for 20 years, a Home Loan Protection Plan such as IDBI Federal Homesurance will cost you Rs. 8,642, while Bajaj Allianz Protector will cost you Rs. 14,899 annually. For the same plan, a Term Insurance will only cost your Rs. 4,015 for SBI Life Insurance, and Rs. 3,673 for Reliance Life Insurance on an annual basis.
Given that Home Loan is itself a cost-intensive product, it is in your best interest to avoid the high premiums of Home Loan Protection Plan.
2. Home Loan Protection Plan Depletes
In case an SBI Home Loan borrower opts for a Home Loan Protection Plan for Rs. 30 Lakh for 20 years, and passes away in 10 years, the Home Loan Protection Plan usually pays off the outstanding loan amount. However, if the remaining loan amount is lower than the actual cover, the borrower is at a loss since they will not be entitled to the entire amount.
For instance, if the said borrower had an outstanding loan amount of Rs. 10 lakhs, the HLPP will pay off the Rs. 10 lakh, thus incurring a loss on the actual cover amount of Rs. 30 lakh.
In such a case, a Term Insurance Plan proves to be a better pick, since it pays off the complete sum assured on maturity.
3. Home Loan Protection Plan has Low Validity
Home Loan Protection Plans such as the HDFC ERGO are valid for just 5 years, which is considerably lower than the usual Home Loan tenure. In such a case, you would be required to renew the plan multiple times and pay the premiums accordingly. Not only is this affair time-consuming, but will also effectively raise the cost of your Home Loan.
4. Home Loan Protection Plan is a Single Premium Policy
At the time of the Home Loan Protection Plan, there is no need to pay the premium. This premium is added to the loan amount and is repaid as a part of the Home Loan. Considering that the premium is already high and that you end up paying additional interest on the same makes this alternative non-viable. On the other hand, you can make the premium payments for Term Insurance in regular intervals, without the need for paying any interest on the same, making it more cost-effective.
5. Home Loan Protection Plan Does Not cover Natural Death
This is probably one of the major drawbacks of Home Loan Protection Plan. By definition, natural death is the death caused by natural causes such as aging or illness. Since natural death is not covered under this plan, it makes the entire exercise futile for a sizeable number of Home Loan borrowers. Of course, there is a plan which covers aspects like permanent disabilities, suicides and natural death, but they entail even higher premiums. Needless to mention, taking term insurance which inherently covers these aspects at a comparatively lower cost is an ideal option.
6. Home Loan Protection Plan Becomes Void on Foreclosure
Home Loan foreclosure is a great facility, which not only allows you to pay off your loan earlier than the maturity date, thus helping you get rid of the debt burden but also allows you to save on the interest outgo. However, when you foreclose a loan, the Home Loan Protection Plan becomes void, and you lose out on the premium paid towards the same.
7. Home Loan Protection Plan Becomes Void in case of HLBT
There may be times when you may want to switch your Home Loan to a new lender in lieu of paying a lower interest rate or enjoying better terms. This phenomenon is known as Home Loan Balance Transfer. As beneficial as it may be, unfortunately, opting for it will leave your Home Loan Protection Plan void. You also end up losing out on the premium paid towards the plan, thus making it a lose-lose situation.
We believe, by now you may have come to understand the disturbing, and in some cases truly unscrupulous drawbacks of Home Loan protection plan. You must understand that your bank may be inclined to sell you such a plan, but you are not obligated to purchase any such product and should make it clear to your lender. After all, your hard earned money should only be invested where it benefits you the most.
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