The Hindu Business Line : <I>Insuring home-loans</I>

My friend's cousin was visiting him in Toronto for the summer. A successful corporate executive in Mumbai, the cousin was planning to buy a two-bedroom apartment. He had already scouted for home-loans and found that a certain company insisted that he also buy an insurance policy. This, he thought was the home-loan company's strategy to create business for a group company that sold insurance policies.

My friend explained to his cousin that the insurance policy would lower his risk of not meeting the mortgage payments. How? Suppose the cousin takes a 20-year home-loan for Rs 25 lakh. He will pay a pre-determined amount each month towards interest on the loan and repayment of the principal. But what if he dies before the loan is repaid?

Of course, the home-loan company can sell the house and use the proceeds to settle the loan.

But nowadays, 85-90 per cent of the property value is given as loan. What if the property declines in value? The home-loan company may find it difficult to cover the amount after the selling commissions. Besides, selling a house is not easy.

It is here that a term insurance policy helps. Suppose the cousin takes a 20-year term insurance policy for Rs 25 lakh.

If he were to die in the next 20 years, the beneficiary of his insurance policy will get Rs 25 lakh. That money can be used to repay the home-loan company and free the property from mortgage. For the home-loan company, the insurance policy lowers the risk of default.

That is why they insist that you buy an insurance policy when to take a home-loan.

(The author is based in Ontario, Canada)

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