Term Insurance Vs HLPP

A home loan protection plan works similar to a term life insurance policy. The risk cover will be equal to the outstanding loan amount at any point of time. But home loan insurance works on a reducing balance principle. As the outstanding loan amount reduces, the size of the cover also reduces.

Let us assume that you have taken a 20-year housing loan of Rs 50 lakh at 9.5% in November 2010. You have also opted for an HLPP with a cover of Rs 50 lakh by paying a single premium amount of Rs 1,72,650 (see graphic). By December 2017, the outstanding loan amount will be over Rs 41 lakh.

If the borrower dies at this stage, the insurer will pay off the balance Rs 41 lakh directly to the bank or the borrower’s family. If this example had to be extended to the term cover, the family will get the entire cover of Rs 50 lakh.

Even after settling the loan amount, the family can still make a saving of Rs 8 lakh. So, even if the total premium outgo is higher for a term premium if paid for the entire policy term, it is still worth the buck. So the term plan is better.

A term insurance policy in this case will mean paying a premium of Rs 11,236 per year or Rs 2,24,720 in total. But the advantage is that it need not be a one-time payment as is the case with HLPP. “The biggest advantage of a term plan is that the life cover remains constant in a term plan over a period of time whereas in an HLPP, it keeps declining,” says Amar Pandit, certified financial planner, My Financial Advisor.

Secondly, you pay a one-time premium in a home loan insurance whereas you make periodic premium payments in a regular term plan. “You are spreading your payment over a period of time and hence the outflow for a certain risk cover is much lower in a term plan,” Pandit adds.

“Under an HLPP, the principal amount, which is over Rs 1.72 lakh, is parked with the insurer. If you stick to a conventional term plan from your early years, you will benefit from lower premiums. You can actually park the surplus funds in high-growth instruments such as equity-linked savings schemes initially, which also provide similar tax breaks instead of locking in at higher premiums,” Sadagopan says.