Role of insurance in Estate planning

Introduction

Life insurance is an asset and an important part of your estate plan. It can provide financial support by providing your family with long-term replacement income and benefits, as well as liquidity to cover immediate expenses such as medical bills, funeral costs, and other unexpected costs.

You can rest assured knowing that the members of your family will be financially secure in the event of an unexpected death. A lot of estate plans include life insurance. It provides support, education-expense coverage, and liquidity to pay taxes, pay expenses and fund retirement plans.

Therefore, What happens to a borrower who dies suddenly without insurance?

If the wife is not employed, her only option is to sell the house and repay the entire loan. The family now faces two losses: one is the income member, and the second is the shelter.

The beneficiaries receive the proceeds of life insurance upon death. These incomes are generally exempt from tax.

A person who purchases property on loan assumes the responsibility to repay it promptly. However, some unforeseeable circumstances such as death, disability, or natural calamities could cause problems. Every person who takes a loan must also consider two types of insurance.

For a prudent homeowner, two types of insurance are mandatory.

1. Borrower’s Own Life Insurance equal to the Home Loan Amount.

Usually, the chief earning member of the family is the borrower. He borrows a home loan to buy his dream home. An EMI is the amount of his income or salary that he pays. Inability to pay EMI due to death can cause problems. The bank asks his legal heir for the full amount of the loan.

If the family cannot pay the outstanding loan, the bank will sell the property. This causes more grief for the already grieving family members. The bank will pay the outstanding amount from the insurer if a person has home loans. After that, the account is closed, and the borrower’s family receives their house back.

They are usually of two types.

(i) Traditional term plan 

(ii) Tailor-made- Decreasing term Assurance Plan

(i) Traditional term plan: This insurance plan has a low premium without return. An assured full amount is returned to beneficiaries upon death. Let’s say that a person needs a term plan for life insurance of 30,000. He now takes out a home loan for 20,000. He should have a minimum coverage of 50,000.

The insurance money received will, therefore,  provide support for his family in the event of an untimely death. His family receives 50 lakh. Family members pay the 20lakh home loan, and the rest they can use to support their family’s livelihood.

Hence, This type of coverage has the main advantage of getting the full coverage equal to the insurance obtained. 

(iii) Tailor-made: Decreasing Term Insurance Plan – This is a decreasing term plan. This plan offers a high amount of protection at a lower premium, but it does not offer any maturity benefits. This plan covers people between the ages of 18 and 65. The loan term expires, and coverage ceases.

Surrender value is available at any time after the beginning of coverage, provided the loan repayment is complete by the end of the term. This plan requires that you nominate a member. It also offers income tax benefits under 80C. In this policy, a person who takes insurance is called Group Member, and the bank that gives the home loan is called as Master Policy Holder.

Salient Features

The loan amount plus the life insurance policy provides coverage for the duration of the loan.

The Insurance Company usually will pay the remaining balance loan, as per the original EMI Schedule, directly to the bank in the event of death. This gives the family complete freedom. The overdue amount is not covered.

The insurance premium paid is eligible to receive a tax rebate under section 80C of the Income Tax Act with a maximum of 1,50,000/.

Death claims are exempt from tax if the nominee/assignee under Section 10 (10) D Income Tax Act.

This policy protects the borrower from any cause of death.

Insurance cover up to age 70 of the borrower, or the last date of repayment, whichever is earlier? Normally loans are also sanctioned up to the age of 70 years. Single premium is possible for the entire duration of the loan.

 The bank may also offer additional loans to cover the premium.

Hassle-free joining process.

The amount of the loan, term of repayment and borrower’s age determine the premium payable.

Exclusion

It is important to note that,  No coverage if death occurs within the first 45 days after insurance cover began.

Suicide during the first 12 months after taking insurance.

Which plan is best?

To cover your home loan liabilities, you can use a term plan.

A term plan is better than a tailor-made, decreasing term plan (also called a home loan protection plan). This is for several reasons. One, term plans tend to be cheaper than customized decreasing term assurance plans. It is simpler to compare term plans offered by different insurance companies as the standard evaluation factors are premium, riders, and sum insured options.

A bank, on the other hand, offers one option for a tailor-made decreasing term assurance plan. Customers don’t have the option to compare prices and pay a higher premium than the best available plan.

A tailor-made, decreasing term assurance plan has one disadvantage: the monthly payment is usually one premium. Prepaying the loan before the term ends, for example, a 15-year loan in 10 years, will result in a loss of premium. This money is not refunded, or very little if it is.

There may be problems porting your home loan protection plan if you move the home loan from one bank into another to get a lower interest. The term coverage is independent of the home loan to keep it and modify it as per your requirements.

2 House Insurance –

Normally in all banks, house/property insurance is compulsory if a person takes a home loan from a bank. Insurance safeguards against unforeseen natural and man-made calamities such as fire, earthquakes, avalanches and terrorist strikes etc.

Simple Cover (Fire and Allied Perils)

This policy protects the infrastructure of your house and its materials from damage due to fire, cyclones, earthquakes strikes, terrorist strikes, etc. This policy is not based on market value but reinstatement value. Reinstatement value refers to the cost of rebuilding or repairing a house in the same condition it was before.

Let’s say that a house is in good condition but is damaged by a natural or manmade disaster. It now needs money to rebuild or repair the house in the same condition it was before. Although insurance companies pay for rebuilding or repairing the house, they do not cover the total construction costs. Insurance might be able to help you if the perils mentioned above damage your house.

A house is the most important asset of an individual.

Home insurance in India is cheap, but very few Indians insure their homes. You will pay less than 2000 per year for the essential coverages your house requires. You don’t have to insure your house for its actual value, but only for the cost of restoring it. Prices can range from 1,000 for a simple structure with no frills to 2,500 for a more luxurious construction.

You must ensure The safety of the contents of your house against any damage.

Fire insurance is intended to cover financial loss due to fire or other hazards. The Tariff Advisory Committee (TAC) governs fire insurance. The following are examples of contents that the Fire insurance policy could cover:

1. Building: Materials of buildings (Machinery and equipment, accessories), goods. Stockpiled in factories and godowns. Electrical installations of buildings. Goods in the open. Furniture, fixtures and fittings. Pipelines inside and outside buildings.

2 Explosion/Implosion. Aircraft damage. Lightning, Storm. Cyclons. Typhoons. Storm. Flood and Inundation. Subsidence. Landslide. Rockslides. Riot. Impact by any rail/road vehicle. Direct contact. Strike, malicious and terrorist damage.

Policy for House Holders

Although more expensive, this covers burglary and breakage as well.. If you feel there is an element of risk, or you can add more sections to increase the coverage if your budget allows.

Standard fire and allied perils policies cover damage from fire, lightning, storms, flood, earthquake, shocks and explosions, storms, cyclones, hurricanes and subsidence vehicle impact. Although you can buy this coverage as a standalone policy, most insurance companies recommend that buyers purchase a comprehensive plan covering many risks.

Many people believe they don’t have to get home insurance if they rent a house. This is false. They still need to insure against damage to their contents and theft. These basic coverages are not expensive. These basic covers are not too expensive if you’ve worked hard to get a house.

Take care when getting insurance.

1. When you buy a property with a home loan, you should always prefer the insurance company your banker has a tie-up. This is advantageous because if there is a loss, the bank can directly request a claim from an insurance company.

2. The loan term and the premium term should be equal. Selecting a single premium will result in a discount.

3. Remember that house insurance does not include land value because it cannot be destroyed.

4. Your valuable assets (AC, LED) should be insured on replacement value, not depreciation.

5. Inform your insurance company if you purchase jewellery or electronic items for your family.  And, Keep these items safe in your bank locker until you use them.