Mortgage Insurance or Term Insurance – Which one is best and cheapest?

Looking to buy a house and can’t decide which insurance to go for a Mortgage Insurance or Term life insurance? Lets discuss both the above in details here –

Mortgage Insurance or Loan Cover Term Insurance
A Loan Cover Term Insurance or mortgage insurance is an insurance that guarantees you to make the payments of a mortgage loan in an unfortunate event of either death or disability. In a loan cover term assurance policy, the sum assured reduces each month/year to match the outstanding principal amount (the premium remains constant throughout the term of the policy, though). Means you are insured for the full loan amount initially & as you pay the EMIs, your insurance amount decreases. Thus, the policy cover always remains equal to your home loan liability. In case of death/disability of the insured, in the middle of the policy period, the policy will pay the outstanding loan amount, and thus would take care of the entire liability related to the home loan.

For example – If you have taken a home loan of Rs 40 lakh and covered under home loan insurance. If after a year, your outstanding loan comes down to Rs 39 lakh, then your sum assured also comes down to Rs 39 lakh. In short the sum assured is adjusted against your home loan liability.

Salient features of Mortgage Insurance plans
1. Sum Insured will reduces each month/year
2. No maturity amount on survival of the term
3. No extra benefit to the nominee, other than payment of home loan liability
4. Single premium or annual premium option

Term Insurance Cover
A term insurance covers for an amount equal to the loan amount of your Home Loan. Payment received under Term Insurance Plan upon your unfortunate death will first be used to reduce or discharge your liability to the bank and the balance will be paid to your nominee.

For example – If you have taken a home loan of Rs 40 lakh and covered under term life insurance. If after a year, your outstanding loan comes down to Rs 39 lakh, then your sum assured will remain same to Rs 40 lakh. So in case of death claim, your liability to the bank (i.e. Rs. 39 lakh) will be paid to bank and remaining amount (i.e. Rs. 1 lakh) to your nominee.

Salient Features of Term Insurance Plans
1. Low premiums, high cover
2. No maturity amount on survival of the term
3. Choice of one time premium or regular premiums
4. Extra benefit will be paid to the nominee, other than payment of home loan liability

Which one to go for?
It is always better to go for term insurance plan as it is available in less premium (compare to home loan insurance). Mortgage Insurance covers function exactly like a simple term plan, except that the sum assured keeps decreasing with the amount owed to the lender. Don’t take any other plan like ULIP or endowment if you are only thinking of insurance. Home loan insurance is just a customise marketing product of term insurance.