Payal and Tarun were very happy. They had just finalized a house costing Rs. 1.4 crores where they had taken a Rs. 1 crore mortgage loan which both of them were to repay over the next 23 years. Excellent considering that they were only 23 and 29 years of age and could afford that EMI.
Their lending company was pushing them to take a ‘mortgage’ insurance from their associate company. It sounded great too. For a single, one time, bullet payment their mortgage would be taken care of. So as time went by they did not have to worry about Tarun’s death. In case he died the insurance company would pay off the mortgage and Payal and her child/children would own the house outright. Sounds great, right?
Well hold your horses.
The mortgage amount will keep dropping. I know Payal – she comes from a family of loan haters and I am sure over a few Diwali gifts my friend (Payal’s father) will dramatically reduce the loan. I also know that the one time payment insurance is EXPENSIVE as compared to a regular term insurance which Tarun needs. A one time payment for a 23 year insurance is also a criminal waste – what happens if T were to die in the second year? the excess premium paid is a waste, right? What happens if the loan is repaid in 7 years (the average age for a mortgage according to a friend working in Hdfc)? And why is the premium so high for a ‘mortgage’ insurance?
Do not fall for this old trick. Without going into the background of P and T (given their family backgrounds they do not need life insurance, believe me). This is what they should do:
Take the mortgage of Rs. 1 crore.
Do not prepay at all, except if interest rates fall dramatically – i mean about 200 basis points at least.
Take a term insurance of Rs. 75 lakhs each, making each other as a nominee.
In case of death of one of them use the Rs. 75L to repay the loan – depending on the amount of loan left, and the loan to be repaid.
For example if T were to die and the loan to be repaid is Rs. 3o lakhs, P can decide to keep the loan as it is and use the Rs. 75 lakhs to repay say a car loan of Rs. 15 lakhs and retain the home loan as it is.
When you have term insurance, take a pure term insurance (not smart term, brilliant term, term with riders, accelerated term, term with return of premium – the industry is full of variants, buy the PURE TERM policy).
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