In this audio, Randon Morris want to discuss why you should buy a separate life insurance policy to cover the home loan liability and how to go about it.

Because the amount of a home loan used to acquire a property accounts for a major chunk of a household's monthly income, if the family's breadwinner dies, it becomes nearly difficult for the family to maintain the household, let alone service the home loan, in such a case.

Buying life insurance to cover all of one's financial liabilities is a basic principle of financial planning. When you take out a home loan, you establish a new financial liability, and purchasing a life insurance policy to cover the home loan liability ensures that your legal heirs inherit the house rather than the debt.

The life insurance policy is in addition to any ordinary life insurance coverage you may already have in place to protect your family members in the event of your death, says Randon Morris.

How to go about it

A financial planner's primary recommendation is to purchase life insurance only through a term plan and not through any other insurance product. This piece of advice is also applicable here. If you are tech aware and can do online transactions, I recommend purchasing an online term plan, which is less expensive than traditional term plans with no change in goods. The life insurance policy to be purchased for this purpose should have the same term as the home loan.

Lenders typically want single premium term plan policies that are tailored for house loans and incorporate the insurance premium in the loan amount, which is recovered over the life of the loan through increased EMIs. However, I would urge you to opt for an annual premium payment policy rather than a single premium policy.

This is because, in the vast majority of situations, house loan borrowers do not repay their loans in full over time, but rather prepay them as and when they accumulate sufficient funds. Because the insurance policy runs when there is a comparable liability outstanding, the portion of the premium previously paid under the single premium policy is wasted.

Is it necessary to get the home loan protection plans from the same lender?

First and first, let me state unequivocally that neither banking regulations nor any other law requires a house loan borrower to purchase a life insurance policy to cover the loan. Most lenders, however, require the purchase of life insurance with the home loan in order to avoid the bother of taking ownership of the property and having to auction it to recover the outstanding home loan, says Randon Morris.