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Sunday, Feb 10, 2002

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HDFC Loan Cover Assurance Plan: Rest assured?

Sanjiv Shankaran

A HOUSE is the single biggest investment most Indians make. But given the exorbitant land prices, it is almost impossible to buy or build a house entirely out of personal savings. Housing loans are, thus, inevitable.

Housing loans call for a repayment commitment over a long period, usually 10-15 years.

During the course of repayment, the house is the collateral, implying that it is not wholly the owner's till the loan is fully repaid.

The consequences of a default in payment are that the borrower loses possession of the house. If the borrower meets with an event that affects his earning capacity or fails to survive the repayment period, the family may find itself in a difficult position.

HDFC Standard Life Insurance has tried to provide a cushion for people seeking a housing loan by introducing a loan cover term assurance plan that pays off the outstanding amount of a housing loan in case the borrower fails to survive the term of the loan.

In short, an insurance policy that ensures that the borrower's family does not lose possession of the house in the event of an unfortunate development.

Salient features

  • The plan provides a lumpsum on death of the life assured during the term of the plan.

  • It is a pure insurance policy without survival benefits.

  • Premiums may be paid at regular intervals or one-time.

  • HDFC-Standard provides the cover for a loan taken from any housing finance company or bank, and not just HDFC.

  • The policy offers an optional accelerated sum assured benefit.

    Simply put, for an extra premium, the policy-holder will receive the insurance claim if he contracts specified critical illnesses, such as cancer or, suffers a heart attack.

    Comparisons: None of the other companies offers a competing product.

    However, a regular term policy can be compared with a loan cover term assurance. But a closer look at some policy features and premium rates indicates that a regular term assurance product may not be suitable for the following reasons:

    When housing loan repayments are made, the outstanding amount of loan declines every year. Consequently, the money an insurance company forks out also decreases.

    Therefore, in a loan cover term assurance policy, a policy-holder has to pay the annual premium only for two-thirds of the term while the cover continues for the full term. For instance, for a 15-year housing loan, an annual premium needs be paid only for the first 10 years while the cover runs for the full 15 years.

    The premium rates are lower for HDFC's loan cover term assurance compared to HDFC Standard's regular term assurance policy. This applies to the single premium and the annual premium options.

    Suitability: For most people, the repayment burden is substantial and if they fail to survive the repayment period, they stand to lose the house. If existing insurance policies and other financial assets are inadequate to cushion an unforeseen event, the loan cover term assurance policy deserves a close study.

    HDFC Standard offers the same cover for loans other than housing loans. The company is also willing to offer the policy for a recurring deposit. To illustrate, a person using a recurring deposit to meet specific future needs, such as education or marriage, can get the target sum insured.

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