Death and Liabilities

Death and Liabilities

Life is uncertain and especially the stress that Covid-19 has brought to our lives makes us think more in terms of monetary planning. People take loans at some point in their lives to meet various requirements of their families. Accidental death of the only bread earner of any family is capable of upsetting the financial algorithm for the survivors. If the deceased person is himself/herself is insured then the insurance company pays a lump sum amount to the survivors. Life insurance is very useful to protect one’s life.The money thus received can be used to meet the routine expenses and also for paying off education, medical and other expenses of the family members in future. 

Similarly, it is important to take care of other obligations borrowed in individual capacity like home loan, car loan and personal loans.  Sudden death of the earning member will make the co-borrower or legal heir of the borrower repay the bank. When the family members of the deceased come to know about the outstanding loans, it becomes extremely confusing and stressful to find a way out of the situation. Is it better to check the loan documents thoroughly in such cases to find if the deceased had taken any insurance for the loan taken? Be it a home loan, car loan, personal loan or any other loan. Even the bank/financial institution can tell if there was one. For example if there exists any such loan insurance, the insurer will take the responsibility to pay off the loan. Death is a highly uncertain thing that can happen to anybody and if that happens during loan tenure, loan insurance can act as a saviour.

In this article we will focus on home loan insurance, car loan insurance and personal loan insurance. 

Home Loan Insurance  

It is a type of insurance whereby the insurer will settle the outstanding home loan amount with the lender or the bank/finance house in case an unforeseen situation occurs. There are comprehensive home loan insurance policies too which cover not only the house but also all its contents. The premium thus paid is eligible for tax benefits. 

Talking about unforeseen events, it can be any kind of failure on the part of the borrower.  Job instability could also be the reason for default. There are regular plans and you can take additional riders to widen the scope of the insurance with extra features. Buying a home loan insurance relieves the borrower to quite an extent as the immediate family members will not be liable to settle the dues.

From a lender’s perspective, the home loan will be saved from turning into bad debts. They also need home loan insurance to protect their money. In the event of a borrower’s demise, the lender is likely to lose his money if there is no insurance. 

Though getting home loan insurance is not mandatory, it is an advisable step. It is different from home insurance. Home insurance protects your house together with its components.  The home loan insurance is not meant for the house but for the loan taken to pay off the purchasing price of the house. It helps in clearing off the debt pertaining to the house in case the borrower dies, becomes critically ill or is unable to pay otherwise. 

Advantages of getting a home loan insurance-

• The insurer repays the outstanding home loan in case of the borrower’s demise, disability or critical illness. The dependants are unable to pay off the home loan and the lender is unable to receive the outstanding loan amount. So both the borrower and lender can avoid financial difficulties if there is an insurance cover. 
• Add-on coverage is possible to enhance the regular insurance plan. There are disability riders and critical illness riders to cover the events other than the unfortunate demise of the policyholder. 
• The benefits under section 80C and section 10(10D) of the Income Tax Act are available.

Types and features of home loan insurance

They are mainly of two types- 

1. Reducing balance plan- Under this plan as the coverage and outstanding loan reduce with the tenure, the insurance company will settle only the outstanding dues of the bank.
2. Level cover plan-unlike reducing balance plan, the insurance cover remains the same throughout the loan tenure. Whatever is the amount covered under the insurance plan, it will be paid to the borrower’s family who had taken the loan. 
3. Hybrid cover plan-The coverage under this plan remains full during the first year and it starts reducing as the balance gets reduced with tenure. 

A term insurance pays a lump sum which can be used to settle the loan obligations. There are people who pay a premium for a very high term insurance plan and think that the claim will be sufficient to pay for everything the family will need in their absence, including outstanding loans.  But it is always better to get home loan insurance  separately. Both types of insurance cover different aspects. 

The home loan insurance features include the following,

1. The sum assured in case of most of the home loan insurance plans is equal to the home loan tenure and works on a reducing balance method. 
2. Anyone above the age of 18 years is allowed to take home loan insurance. 
3. It being a death benefit is normally tax-free.
4. In case of death of the insured, a lump sum amount for the outstanding home loan is paid to the nominee and the policy is terminated.
5. The sum assured keeps reducing with the reducing home loan every year.
6. Majority of such plans are single premium plans. Usually it is included in the home loan amount and is paid alongwith the home loan instalments. A few insurers allow annual payment of premium.
7. There is no maturity benefit as the aim behind this kind of insurance is to cover the outstanding loan amount in case any unforeseen event takes place. 
8. Several insurance providers offer home loans with optional rider plans to enhance their coverage. The riders usually offer terminal illness like cancer and heart attack, accidental death, disability, and risk of joblessness for a period of three to six months. 
9. Home loan insurance does not cover suicide or death due to natural calamities or war.
10. Under a joint loan, single home loan insurance can cover all the borrowers. 
11. If home loan balance is transferred, home loan restructuring is done or full repayment of loan amount is done, then the policy could lapse. 

Why is home loan insurance important?

If the family or legal heirs cannot repay the outstanding loan the lender can lawfully take possession of the house. The bank however helps the family to repay the outstanding amount and taking possession of the property is the last recourse considered by the lending bank. The co-borrowers and legal heirs are given sufficient time to make the repayment. To avoid all the legal and other complexities, it is always better to take insurance for your home loan. It will prove to be an important repayment tool when the borrower is incapable of doing so.  

The home loan insurance may be purchased in the following ways- 

1.Term insurance: Term insurance takes care of all the liabilities and debts of its policyholder. The coverage stays the same and the sum assured is received by the nominee who can make the payments to the lender bank for settling the loan. 

2.Seperate home insurance: under this scheme only the outstanding home loan is taken care of by the insurance company when the insured is unable to pay it. The insurer directly makes the payments for the home loan outstanding to the lender to settle the loan. 

The things you should consider while taking a home loan insurance: 

• You can buy home loan insurance either from the home loan company itself/a general insurance company. The insurance taken from a general insurance company is for a longer term. The insurance thus taken needs to be renewed every year.  
• Tenure of the loan and insurance cover period must be the same. Do not take a short term insurance with a plan to extend it later. It is quite likely that such an extension never happens and it can be forgotten.  With age it becomes an expensive affair.
• The scheme should match all your requirements. Do some research on available home loan offers and choose the one which meets your criteria. 
• You need to consider how the home loan expense will reflect on your EMI. Premium amount included as part of your EMI must be known to you.
• Riders and add-on covers might enable you to better manage the risk. You need to inquire about the scope of the policy whether it covers a natural death alone or accidental death too. The rider may expand the coverage if it takes into account reasons like critical illness, disability and unemployment.
• Premiums of home loan insurance are dependent on the factors like: age of the insured, loan tenure, loan amount and medical history of the borrower. 

Now let us see how Vehicle loan insurance works.

This is credit insurance and completely optional that makes your vehicle loan payments to the lender in certain situations like death or disability. You may be asked the purpose behind taking such an insurance. Do some research before deciding about the cost of this insurance and available options. The auto lenders might themselves ask you to take a cover for the loan they want to offer.  There are insurance providers offering plans to cover a wide range of loans including housing loans, Vehicle loans, Personal loans, Consumer durable loans, etc. You may consider taking a comprehensive plan as well that covers all of your loans. Vehicle loan insurance is completely optional. 

What does a Vehicle loan insurance typically cover?

• It usually provides for insurance against default in payment of a vehicle loan by the borrower, on account of bodily injury, solely or directly, caused by accidental, violent, external and visible means resulting in death or permanent total disablement. 
• The disablement or death however must have occured within the time prescribed in the policy. Disablement too needs to be confirmed or claimed subject to the conditions specified therein. 
• It also covers certain critical illnesses due to which the default in payment takes place.
• Loss of employment too is covered.
• The premium amount is dependent on age and other factors. Typically it is a percentage of the loan amount. 

Insurance for Personal Loan-

Again, it is not mandatory to take insurance for personal loans. Decide the factors before opting for a personal loan. This coverage also, just like the insurance for home loan and vehicle loan, ensures that if any unwanted situation like disability, death or unemployment arises, and you fail to pay the loan, your insurance will cover all your remaining dues. The benefits are the same as described before, like, the borrower’s family will not be burdened with a sudden financial obligation to repay the loan. However, tax benefits are usually not available for the premium paid. Some personal loan insurance policies have a money-back plan where the buyer gets a certain amount at the end of the plan. 

You can pay the insurance upfront with a lump sum amount or you can pay it through EMIs attached to your regular loan instalments. 

The factors that you need to keep in mind-

1. Go for it only if you can afford it. The banks or finance institutions offer you such insurance as it is a wise decision to make it convenient for your family considering the possibility in case you are unable to repay it. Naturally, you had plans only for a personal loan but not for its insurance. It will add the cost of finance. Either you end up paying a lump sum premium or it will be added in your EMI along with interest. So it is undoubtedly an additional cost. 
2. Compare different insurance schemes before choosing one. If you do not search for other options, you may end up paying more. Understand them thoroughly, ask questions whenever you have doubts, check the premium rates. 
3. There are foreclosure charges when to pay off the loan before its duration. You will lose the insurance benefits in that case. Are you going to get a refund if the premium was paid  lump sum and if paid in instalments, what will be the effect of the same when the loan is repaid before time? The loan insurance policy may lapse or expire if transferred to another bank.
4. Understand all the terms of the insurance. There are schemes which do not provide for job loss and even natural death. You should select the plan which is the perfect fit in your case. It should preferably cover all causes of death. Both temporary and permanent disability should be covered. 
5. There is a possibility that the insurer will ask you to take a few medical tests to know your health condition. 
6. Few banks provide joint insurance covers. Some plans do not cover higher loan amounts and a few others may not require a premium amount.

Banks usually push a borrower to get insurance for a personal loan; they want an assurance that the borrower will repay the loan. By taking insurance for personal loans, they want to ensure that they will be able to recover the loan amount. 

Premium amount for personal loan insurance plans-

It is dependent on the borrower’s age, loan amount, loan tenure, present health conditions etc. If the borrower’s age is more, the premium charged will be higher. If the loan amount is high, the premium will be obviously high, if the loan tenure is long, again the premium will be higher. If the borrower is not in a good health condition, the premium amount shall be high. 

Types of Personal Loan Insurance Policies

They are as follows,

• Single and regular premium reducing cover: The amount of premium decreases as the outstanding loan amount decreases during the loan tenure.
• Single and reducing premium level cover: The premium amount remains the same although the outstanding loan amount gets decreased. 

Sometimes the way the executives of banks explain it to you, it feels like it is mandatory. It is advisable to have insurance for personal loan, only after considering the various points discussed here.

Which is a better option?Insurance from the company itself sanctioning the loan( be it home, vehicle or personal) or the one taken independently?

The cost which is to be paid by way of premium is the decisive factor. There are other considerations too, like various clauses included in the policy, which will help you arrive at a better decision.

You should look for the best possible option depending upon the type of policy you need based on your age, amount of insurance etc. When you get a loan from a bank/financial institution, they may extend this facility to you. For example, the auto dealers selling the vehicles might offer you a loan facility and insurance for the same. What is important is, you need to compare the cost of the insurance available through them with the ones which you can take independently from other service providers. 

If we take a vehicle loan provider’s example, the entire process might be well streamlined and more convenient when done through a dealership. Suppose the car purchase- loan and the insurance for the loan all are combined, you may get attractive discounts. There could even be a waiver of the first year premium. Add-ons are available along with few other services. There is a dedicated help desk for insurance claims and claim settlement in case of need. 

What you should be aware of is: such dealers might have their own way of attracting customers with all made up, pre-packaged policies. They could hardly be of any use and you may be charged a higher premium for that. You not only fail to save cost, but also pay a higher charge than usual. By choosing any particular insurance company which has a tie up with the dealer, you do not get to know about existing policies and their features. When you need a particular type of coverage, like disability coverage or insurance for a job loss situation, you need to emphasise on that point and shortlist the policies which justify your purpose. If the one offered to you by the dealer is not covering it, there is no point in getting it. 

Usually the premiums charged by the other lenders are higher than independent insurers. If you search for a suitable insurer you get many policies provided by different companies and thus you get many choices too. Compare the statistics for both the options by undertaking some research about the claim settlement process, which should preferably be quick and hasslefree.  Read the reviews posted by other users of the facility. The grievance redressal is also something worth noticing. What saves your time and cost matters. The numbers post discounts with favourable terms must be given preference. 

This was an example for insurance for a vehicle loan. The same rules apply for home loans and personal loans too. Merely for the sake of convenience, do not add up everything unless it is genuinely proved worthwhile. Take a day or two to do your homework before finalising the deal. You are free to choose. Do not get compelled by the loan provider as it is not at all mandatory to get any insurance for the loan in the first place.  Transferring a loan insurance often ends the very purpose of getting it as. Better to choose the right one, instead of regretting it later. 

We can conclude that just like life insurance cover, loan insurance coverage too holds a lot of importance. Not many people understand it or have given a serious thought, but it will be for your own good if you are able to include it by spending a little more in your personal financial planning strategy. 

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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