Have you e(i)nsured that your family can stay in the same property?
Most people who buy their first residential property opt for a housing loan. Let’s say Vivek buys a flat for Rs one crore. He pays Rs 40 lakhs from his source. He raises a 60 lakhs housing loan from a financial institution for 15 years.
Now, the flat is mortgaged to that Financial Institution. “Plan A” is Vivek completes the loan term successfully and repays the principal and interest in 15 years or earlier. After repayment, the financial institution will cancel the mortgage and transfer the property to Vivek
What if Vivek, unfortunately, dies after, say, three years? The outstanding loan is, say, Rs 56 lakhs.
There are two situations –
1) Family members have to repay the outstanding loan so the Financial Institution can cancel the mortgage and the flat is then owned by the family members.
2) If family members cannot raise an amount equal to the outstanding loan, the financial institution will sell the property. The balance of total sale proceeds less outstanding loan/interest will be paid to family members. Imagine, family members will have to shift to another house. They may have to adjust to a flat smaller in size or far away from the city. It would be very difficult for the family to cope with, in addition to the loss of a near and dear earning member.
If Vivek purchases Life Insurance equal to the loan amount, say 60 lakhs in this example, the policy will be assigned to the financial institution. In case of an unfortunate death, Rs 56 lakhs will be paid to the financial institution and the loan will be fully repaid. The financial institution will then cancel the mortgage and the flat will be fully owned by the family members.
What if Vivek meets a serious accident and becomes permanently physically disabled in such a way that he cannot earn? Now his income stops abruptly, and his maintenance expenses will go up significantly. If he is unable to repay the loan EMI, the financial institution will ask the guarantor (if any) to repay EMI / loan, or the flat will have to be sold.
Some companies offer an “Accident & permanent disability” rider (add-on) when you apply for new Life Insurance. If the rider is opted for Rs 60 lakhs, in the above scenario –
(1) The balance (future) Insurance premium will be waived off
(2) Rs 6,00,000 will be paid every year for the next 10 years. This amount can be used to repay EMI and the family can stay in the same house
If a flat/loan is in the husband-wife joint name (both earning), generally, EMI could be almost equal to one person’s income. The situation could be more or less the same.
Moral # 1: It’s an absolute must to buy Life Insurance, at least equal to the loan amount, with a permanent disability rider, so family members can continue to stay in the same flat.
Moral # 2: Remember above 60 lakh Life insurance will only help clear housing loans. The earning person will also need more Life Insurance so his family members can continue the current standard of living in his absence, besides creating a child’s marriage/education fund.
Life Insurance Agent