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How to Use your Life Insurance to Buy a House?

dateKnowledge Centre Team dateJune 14, 2021 views232 Views
Life Insurance to Buy a House | Best Life Insurance

Few long-term investments are as safe and versatile as life insurance plans. If you have been investing in any of these long-term investment plans, including a life insurance policy, you can use the corpus for another asset – a house.

Home is one of the essentials for life. Thus, home buying could be a financial goal you’d like to achieve in your life, and the sooner the better. Not only that, but the house is also a long-term asset, which grows in value gradually and can even become a source of funds in your retirement.

So, how can you fund your house purchase dream?

Here are the two possible ways:

1. Define the goal and start investing now

2. Use your existing investments to achieve the goal

1. Defining the Home-Buying Goal

Home buying goal is so flexible with several options that you really have to sit down and make notes, and perhaps you should. However, for the sake of simplicity let’s just take one scenario:

    “You want to buy your first house, and you want to do it as soon as possible”

You can either buy a house using a bank loan or buy a house completely out of your pocket, that will be your choice. However, in both cases, the value of your dream property will define the financial goal for you.

For example, assume if you wish to buy a property that costs Rs. 60 lakhs today:

  • Rs 60 lakhs + 12% of Rs 60 lakhs (approx. Rs. 70 lakhs) should be your financial goal if you want to buy out of pocket
  • 20% + 12% of Rs 60 lakhs (approx. Rs 20 lakhs) should be your goal if you wish to use a home loan for the purpose

Using Existing Life Insurance Policies for the Goal

Life insurance policies like unit-linked insurance plans and endowment plans acquire cash value as you continue investing in these policies. So, if you have started a policy 10 – 15 years ago, the policy may have acquired enough cash value to help you achieve your home buying goal.

If not, you can continue investing in the policy and start a new investment as well to achieve your goal. Life insurance plans like endowment and money-back plans acquire higher cash value as they near their maturity.

How does Cash Value Work?

You can use your life insurance policy’s cash value in two ways:

- Surrender the policy

- Borrow from the policy

If you surrender the policy, you will get 100% of the cash value of the policy. However, the policy will cease to exist, and you may lose a chunk of your life cover.

Borrowing against the policy or from the policy will give you only 80% of the cash value. But it has other advantages:

  • Low rate of interest on the loan
  • The policy continues and you will still receive the balance maturity value
  • Life cover continues
  • You can repay the money for the policy and enjoy an even lower outflow towards interest payments

Remember cash value of the policy is only a fraction of the maturity value. So, it does not make much financial sense to surrender the policy in the final few years as you may lose a larger chunk of the bonus additions which are payable on maturity.

Learn 5 ways to cash out a life insurance policy.

When to Use the Policy Cash Value?

You should use your policies cash value only under the following circumstances:

  • The policy will mature after more than three years
  • You cannot withdraw from the policy

For example, if you have a unit-linked life insurance plan you can withdraw money from your policy before maturity. So, if withdrawals are enough to meet or cover more than 80% of your goal no need for using cash value.

However, in case, which is very likely, you do not have a long-standing life insurance policy in your portfolio, you can start investing today.

Invest in Life Insurance Plan for Home Buying Goal

Investing in a life insurance policy to meet a large financial goal is nothing new. You can use life insurance plans to meet important and large financial goals such as higher education for your child. So, the home buying goal should not be too different.

However, you would like to expedite the home buying goal, even with a new investment route. And before you go on investing here’s why life insurance plans could be the best instruments for this goal:

  • Additional life cover, i.e., additional financial safety for your family
  • Only investment plans with an option to protect the goal
  • You can invest both aggressively in equity and play safe with guaranteed plans
  • Tax-saving on invested money and tax-free maturity value

So, here are few investments plans you can consider:

1. Unit Linked Plans – Invest Aggressively or Play Safe

Unit linked insurance plans or ULIPs are versatile investments that let you invest in a mix of equity and debt funds. You can also choose to invest only in equity funds or only debt funds, depending on your risk appetite and preference.

Here’s how the best online ULIP plans like Invest 4G from Canara HSBC Oriental Bank of Commerce Life Insurance facilitate equity investors:

  • Manage your portfolio risk automatically
  • Use automated strategies to always benefit from market movements
  • Bonus additions for long-term investments
  • Switch anytime between funds
  • Automatically and systematically transfer your equity portfolio to debt in the final few years of the policy
  • Partial withdrawals are allowed after a five-year lock-in period in the policy
  • Protect your home purchase goal for your family from your untimely demise

Guaranteed Savings Plans

A Guaranteed Savings Plan is an endowment plan with guaranteed maturity value. You can estimate your guaranteed maturity value at the time of starting your investment. Or you can choose a goal and start investing accordingly in this plan.

Plan

This plan has:

  • Guaranteed bonus additions for regular and long-term investors
  • Tax benefits on investment and maturity value
  • Goal protection feature

Goal protection or premium protection option allows your investments to continue even after your untimely demise. The insurer will continue to invest the due premiums on your behalf and will pay the maturity value to the family. In the meanwhile, your family will also receive the guaranteed life cover amount upon your demise within the policy term. Thus, the plan fulfils their immediate and future financial need with this option, and your family can still have a house of their own.

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Frequently Asked Questions (FAQs) for Life Insurance

The premium is one of the most important factors to consider before buying a policy. Many people buy a life insurance policy with a high sum assured but are unable to process the premiums for the entire premium payment tenure. You can get a better idea of the premium outgo with the premium calculator available in the 'Tools and Calculator' section of www.canarahsbclife.com.

Life insurance plans come with several riders which increase the efficiency of the policy for the buyer. For instance, if you have a history of terminal illness in your family it would be advisable to opt for terminal illness rider with your term insurance. Riders or add-ons help in customising the standard policy benefits for the requirement of different families. The iSelect term insurance plan comes with a built-in cover for terminal illness, and option for protection against accidental death or disability. You can also opt to cover your spouse's life under the same policy by paying an additional premium.

Insurance companies calculate the premiums based on several factors such as age, gender and occupation.

Age:It is one of the biggest factors that influence life insurance premiums. Premiums tend to be low when the life insured is younger as the chances of contracting diseases is low. Young people also opt for policies with longer tenures and pay premiums for a longer duration, which makes the policy cheaper for young people.

Gender:The insurance premium for women is generally lower when it comes to life insurance plans. Women live longer and pose a lesser risk of a claim leading to lower premiums for them.

Lifestyle habits:The premiums for people who smoke or drink is always higher due to higher health risks.

Policy term:Policy terms are also taken into consideration by insurers while deciding the premium amount. Policies with longer tenure are cheaper as compared to short-duration policies.

Mode of purchase: The platform that you use to buy the policy also determines how much you will have to pay for the plan. People who buy life insurance policies online have to pay lower premiums as compared to offline policies.

Occupation:The nature of your work is an important factor that influences the premium amount. Certain occupations like shipping and mining are considered more dangerous as compared to jobs in services industries. The insurance premium rises with the risk profile.

Processing life insurance claim is a transparent and smooth process with Canara HSBC Oriental Bank of Commerce Life Insurance.

In case of the death of the life insured, the nominee will have to intimate the company by filling a Death Claim Form and sending it to the nearest branch office.

Once the form is received, the claim is registered by the insurer.

After the registration of the claim, the company will send the claims pack along with the related forms such as physicianâ s statement form and employer certificate that need to be filled.

Along with the duly filled forms a few documents such as original [policy document, death certificate, copy of bank passbook, hospital or treatment records, photo identification and address proof have to be provided.

The claim is processed on the submission of relevant documents. Once the documents are verified, the claim amount is released post all due diligence.

Household expenses rise with age. The cost of children's education increases along with other lifestyle expenses. The iSelect term plan offers an option to increase the cover according to the life stage. If opted, the insurance cover increases by 25% at every 5-year terminal till the 20th policy year.

Even though a life insurance policy is bought to protect your family in your absence. There are chances of the claim being rejected due to several factors.

False information: If the policyholder provides false information or conceals important information while buying the policy, the insurer has the right to reject the claim after his/her death.

Type of death: Deaths due to suicide in first policy year, intoxication or pre-existing disease is not covered under life insurance.

Premium payment: The payment of premiums on time is of utmost important to avail the benefits of life insurance. Life insurance policy may lapse on the failure to pay the premiums

Nominee details: An insurance company can put the claim on hold if the nominee details have not been filled or not been updated by the policyholder.

Suicide: If the life insured commits suicide within 12 months of buying the policy, the insurance companies generally pay 80% of the total premiums paid.

Buying life insurance online is not only safe but a better option. Online life insurance policies have lower premiums and the individual is not required to visit the insurer's branch or a bank. Online insurance policies also offer higher benefits. Customers should, however, buy online policies only from credible insurers and should check for SSL certificate on the website to ensure that the website is legitimate.

The cost of life insurance policies varies depending on factors like age, gender and occupation. The average cost of life insurance plans, especially term plans, is very low compared to the amount of coverage offered.

An individual is allowed to have multiple life insurance policies. People opt for more than one policy to increase the cover or avoid claim rejection. In case of multiple policies, even if the claim is rejected by one insurer, the beneficiaries may receive the benefit from a different insurer.

Life insurance policies are of different types. In the case of unit-linked or endowment policies the policyholder receives the maturity benefit at the end of the policy term. However, in the case of term insurance plans, there are no maturity benefits. The death benefit is only paid out after the death of the life insured.

When you buy life insurance, the insurance company asks for the nominee details. Only the person named as the nominee in the policy can cash out a life insurance policy in case of death of life insured.

A life insurance policy is generally taken for a specified period. After the policy duration of a term plan gets over, the policy simply terminates and ceases to exist. However, in the case of unit-linked plans or endowment, you can use the policy as a tool for retirement planning and the accumulated corpus is used by the insurer to pay you monthly amounts for your entire life.

If a policyholder purchases a term plan for 25 years and dies during the policy term. The family receives the death benefit. In the case of iSelect term plan, the policy provides four payment options to the beneficiaries. If the regular payment options are chosen the policy works as a source of regular income.

It is a popular misconception that life insurance is only for accidental deaths. A term life insurance plan like iSelect also covers terminal disease along with death. A terminal illness cover is important as health insurance pays only for the cost of treatment and hospitalization, but a terminal illness cover pays you a lump-sum amount which takes care of other expenses. On the other hand, unit-linked policies such as Invest 4G cover death and also provide decent returns for other financial goals such as buying a house of child's education.

It is ideal to buy life insurance in your early 20s because it’s is the time when people have just started with their professional life and so there are lesser responsibilities and financial liabilities to take care of. Also, if you buy life insurance at this age, you will be paying relatively lower insurance premiums since it’s a due fact that mortality rate in case of young people is low. And that is why insurance companies offer lesser premium rates to younger people as they think that they are most likely to be fit and healthier with less chances of filing a claim in future.

Once you have cancelled your life insurance policy, you will instantly lose your life insurance cover. Afterwards, your insurance company will get in touch with you and ask for valid reasons regarding the cancellation of your policy. In case you cancel your life insurance policy within the grace period, i.e. 15 to 30 days, depending on your insurer, then insurance company will reimburse the premium amount paid by you. But, no refunds will be paid to you if the policy is cancelled after the grace period.

Yes, you can take life insurance under Married Women’s Property (MWP) Act, 1984 only if you are a married man and a resident of India. Buying a life insurance plan under MWP Act would be helpful in saving your family’s financial well-being when you are not around. As per this policy, only wife and children would be eligible to receive the death benefits. You can also buy a policy if you are a widower or a divorcee. However, in that case, you can give your child’s name as your beneficiary. It is very simple to buy a life plan under MWP Act. All you need to do is to fill up an MWP addendum while purchasing an insurance policy.

Yes, there are different payment options for you to pay premiums. Here’re some of them

    1. Regular premium payment option – This premium payment option allows you to pay premiums equal to your policy term either monthly, quarterly, half yearly or annually.

    2. Single payment option – Through this premium payment option, you can pay the lump-sum amount in one single payment.

    3. Limited payment option -In this premium payment option, you can pay premiums for a specific period of time less than policy term either monthly, quarterly, half yearly or annually, but benefits of insurance can be enjoyed for a longer period of time.

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