In this day and age, the younger generation focuses a lot on fulfilling goals and dreams. They have huge goals for themselves and their families. If a loan is what it takes to buy a new house, a new car, or pay for higher education in a foreign country, there’s no two ways about it.
However, there might be a situation in which you are unable to pay your loan back. The last thing you’d want is your family facing the burden of an unpaid loan. To avoid such an issue, having an insurance plan can give you the required security. Contrary to some beliefs, a term plan is a great option for securing your loan.
Term insurance as loan security
A term plan is the most basic form of life insurance yet it is considered as the best life insurance plan by many. It is for a specific time period and is a pure insurance product with no savings or investment component. It provides a large sum assured at a low premium rate. In the event of your death within the policy term, your term insurance will give the sum assured to your family or nominees, taking the financial burden off their shoulders. If you outlive the policy term, you can simply renew your policy and continue to enjoy the security cover. Nowadays, term plans even come with a Return of Premium option which essentially makes them savings plans too. It thus makes a lot of sense to use a term insurance plan as a loan security and help your family tide over emergencies.
Payouts and loan repayment
Choosing a suitable payout option for your term insurance is one of the key steps while buying a plan. You can choose to either receive the sum assured or death benefit as a one-time lump sum payment or as staggered payouts. If you choose a lump sum payment, your nominee will receive the whole amount at once and the policy gets completed. In the other case, the money is paid to them in small installments at regular intervals.
Best life insurance payout options for different types of loans
The kind of payout option you choose should depend not just on your family’s financial status and goals, but also on the kind of loan you have secured with your term plan.
Home loan amounts are generally on the higher side. Hence, it makes sense to go for a lump sum payment while buying your life insurance plan. While you do so, you can also consider opting for a critical illness rider. The rider will be a Plan B in case of an unexpected critical illness like cancer or diabetes in the family. The ideal range of critical illness cover for such a term insurance plan would be Rs.20-30 lakhs.
Compared to a home loan, an education loan’s amount and EMI is smaller. Thus, you can choose a monthly income payout instead of lump sum. This will allow your family to pay off the loan while also handling their regular expenses.
Personal loans, too, usually have a smaller sum and a smaller repayment period. A fixed monthly income or increasing monthly income payout should easily pay it off without much stress.
Car loan amounts are usually bigger than those of bike loans. You can probably choose monthly income payouts for bike loans to spread the debt. For a car loan, you can choose the regular income + lump sum payment option. The ratio will depend on your loan amount.
Additionally, an accidental death benefit rider is essential with your insurance if you drive a vehicle regularly. This will ensure that the loan is taken care of even during a medical emergency.
The best insurance plan is undoubtedly going to be the one that takes all of your and your family’s needs into account. Make sure it is comprehensive enough to be able to secure your loan. Here’s one of the most suitable options for a term plan:
The iSelect Star Term Plan by Canara HSBC Oriental Bank of Commerce has features such as whole life cover, return of premium, multiple payout options, increase coverage options, and tax benefits. You can also buy cover for your spouse under the same plan. In addition, you get the flexibility to choose from various coverage options, premium payment modes, and benefit payout options. All of these benefits are just a few clicks away.
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