A life insurance policy is a financial promise, made to a policyholders family, that they will be taken care of even in his absence. But, there are things that the policy holder must ensure to enable the promise to be fulfilled. Let’s consider the following case study of a life insurance taken to cover a Loan Against Property to understand this point.

Amish Kumar (name changed), a textile businessman, along with his father, borrowed an amount of Rs. 2 Crores from a reputed bank as a loan against property. To ensure the repayment of the loan even during his unexpected physical absence, he purchased a life insurance policy with a sum assured of Rs. 1.5 Crore with a yearly premium payable over a 10-year tenure. In the event of his unfortunate demise, the sum assured would be directed towards repayment of the loan against property to the bank by the insurer.

During the policy tenure, Amish, unfortunately, passed away after a brief hospitalisation. When Amish’s father lodged a claim with the Insurance company, it was rejected on the ground that Amish concealed his medical history and that he was already suffering from a critical illness at the time of policy purchase. Subsequently, Amish’s family registered a complaint with the National Consumer Disputes Redressal Commission, which in fact, observed that Amish was a chronic smoker, and was suffering from a heart ailment at the time of policy purchase. The Commission also stated that suppressing material facts in a policy proposal form, constituted a breach of good faith, allowing the insurer to treat the policy as voidper Supreme Court’s precedent in previous cases. With the insurer disowning the claims, Amish’s family had no other way, but to sell their property to clear their loan.

An insurance policy can help to cover the borrower’s loan liability in case of his/her premature death without burdening the aggrieved family. There are two ways to cover such loan liability:

Term Policy

The borrower can purchase a term policy or use an existing life insurance policy to cover the risk of the insured’s premature death.
In a term policy the sum assured remains constant. Opting for a higher tenure than the loan period would be beneficial to address increase in tenure in floating rate loans.
The sum assured is paid to the family in case of the insured’s death, and the family can pay the bank an amount equivalent to the outstanding mortgage loan amount.

Loan Protection Plans

Exclusively designed to cover different kinds of loans with relatively affordable premiums, the sum assured for these plans reduces annually and is adjusted as per the outstanding loan amount. These plans come with options for sum assured and tenure.
In case of the borrower’s premature death, the insurer directly pays the outstanding loan amount to the lender and balance if any to the nominee including single premium plans to suit the borrowers needs.

Importance of Accurate Disclosure While Availing Insurance against Mortgage Loans

Transparency is the key to securing your family. Death claims are dependent on a number of factors, but the most important factor for a hassle-free claim process is accurate, complete and honest declaration of in the short medical questionnaire, thus avoiding any risk of the claim being rejected.
One must declare medical history and lifestyle disorders with full details and not give an incorrect age or tamper with the documents required for the application. The terms and conditions of the policy issued must be carefully read and understood. If there are areas or features that are not clear, one must contact the insurer to clarify the doubts. As the stakes with the Insurance policy is high, opting for the policy and linking it to your loan can cover your liabilities and relieve your family’s burden.

Conclusion

It is also pertinent to note that life is unpredictable and one unfortunate incident can put your family’s financial security at risk. As the stakes with a loan against property are high, opting for an insurance policy and linking it to the loan shall relieve the burden off your family, and cover your loan liability in case of any mishap. Besides, availing a loan against property and linking it with a life policy from reputed lenders such as HDB Financial Services (HDBFS) through their online or offline channels not only ensure lower EMIs but also cheaper policy premiums.