Whether you are a first-time home buyer or have been through this process before, getting a loan to help you pay for the property will be the most time-consuming aspect of the purchasing process. The reason why this process takes time to complete is because a bank or similar financial institution must take a certain amount of risk to provide you with a loan that you will make payments on. These payments must typically be paid for a period of 15-30 years and will come with a certain amount of interest.
However unlikely, there’s always a possibility that you will be unable to make your loan payments on time every month. In the event that you lose your job in the future or experience some kind of unforeseen medical emergency that comes with high bills, your monthly mortgage payment could be higher than you can afford for the time-being. If you want to protect yourself in this situation and make sure that your home isn’t foreclosed on, you should consider obtaining loan protection insurance.
Loan insurance is able to cover the monthly loan payments you’re expected to make in the event that you lose your job or suffer from a temporary or permanent disability. With one of these insurance policies in hand, you should be able to avoid defaulting on the loan. You can obtain loan insurance for many home loans that are available to you. The insurance premiums you’re expected to pay for the insurance can be paid out in monthly installments or in a lump sum immediately upon purchasing the insurance policy. Along with home loans, loan protection insurance is commonly selected for personal loans, education loans, and business loans.
The insurance policy of your choice depends on the kind of coverage you want. Each policy offers different amounts and types of coverage. In general, purchasing loan protection insurance shouldn’t mean much to your home loan. In the event that you are unable to make some payments on this loan because of a situation that’s covered by the policy, the insurance will cover the remaining cost of your loan. Obtaining this insurance can lower the risk for the lender, which makes them more likely to provide you with a loan.
The main downside of purchasing loan protection insurance is that it can be costly. These costs are usually around .2-.3 percent of the mortgage price and are typically meant to be paid on a monthly basis. Lenders commonly offer this form of insurance after you apply for a mortgage loan. While it might seem like a great idea to purchase loan protection insurance, it’s not exactly necessary and may not be the ideal decision for your situation.
If you opt for loan protection insurance, keep in mind that there’s a difference between an open-ended and closed-ended loan, the latter of which is available for mortgages. The terms of this loan are decided at the beginning of this process and will usually require you to pay a single fee for the insurance when you take out the loan. This guide takes a closer look at loan protection insurance and whether or not it’s right for you.
- Loan insurance is a type of protection policy that makes sure your home does not get foreclosed on if anything happens to you in the future.
- There are two types of loan insurance which include reducing cover insurance and level/flat cover insurance.
- There are many reasons for loan protection insurance and we discuss every factor involved to help you decipher if it may be right for you.
Reasons for Loan Protection Insurance
There are plenty of reasons why you should choose to purchase loan protection insurance when you apply for a mortgage. While the costs are high, there are some situations and circumstances where having loan protection insurance would be beneficial to you. Let’s say that you apply for a mortgage that will allow you to buy a new home. The mortgage payments that you’ll be tasked with paying every month will come from your monthly salary, which is high enough to cover the costs of the monthly mortgage payment and any other expenses you have.
However, it’s possible that you could get into an accident or lose your job just weeks after you move into your new home, which means that you would need to make monthly payments without having the means to do so. Unless you have an ample amount of savings in your bank account, you would likely find it difficult to make your monthly payments without some assistance. On the other hand, having an insurance policy in your pocket means that your following payments would be covered, which would allow you to avoid defaulting on the loan. By making loan payments on time, your credit score won’t drop, which invariably occurs when missing a loan payment.
There are two basic types of loan insurance plans, which include reducing cover insurance and level/flat cover insurance. These two plans involve:
- Reducing cover insurance – The amount that you owe each month for the insurance policy will reduce over the period of the loan
- Level/flat cover insurance – The monthly premium that you pay will remain a fixed amount throughout the term of the loan even when the outstanding loan amount is reduced
The Difference between Loan Insurance and Term Insurance
Before you obtain a loan insurance policy, it’s important to understand that this type of policy is different than term insurance. Term insurance is a type of insurance protection policy that will be able to protect your family from substantial financial loss in the event that you die or suffer from a temporary or permanent disability. The amount of coverage that you obtain with a term insurance policy would be paid to the beneficiary of this policy. However, the policy only provides a certain amount of coverage and may not be enough to cover all of the liabilities that must be paid.
As for loan protection insurance, this type of insurance provides coverage for the exact loan amount of the loan that you’ve acquired. If you apply for a mortgage loan of around $200,000, the protection insurance policy that you select will provide coverage that will pay off the entirety of this loan. Payment will occur if the individual who requested the policy becomes unable to make monthly payments on their mortgage. Since term insurance is typically capped at a specific amount, loan protection insurance policies can provide more coverage and may be more useful to you when compared to term insurance.
Key Factors to Select the Right Loan Insurance
If you’re attempting to select the right loan insurance policy, there are some key factors that you should take into account, which include:
- What situations does the insurance policy provide coverage for? Consider a policy that offers coverage for disability, death, and unemployment.
- How does the insurance premium need to be paid?
- What type of loan is available to you? Certain insurers will only cover personal loans or home loans and may not provide coverage for loans that are higher than a certain amount.
- Make sure that you understand the terms of the policy, which include exclusions, inclusions, exempted health conditions, and any special citations.
- Make sure that you know what the tax implications are. If the loan payment is separate from an EMI, a tax rebate can be claimed.
Mortgage insurance is a kind of insurance that you will need to purchase if you can’t provide a down payment of 20 percent. You could get a conventional loan, a USDA loan, an FHA loan, or a VA loan. Keep in mind that standard mortgage insurance is designed to protect the lender if you fail to make a mortgage payment on time, which means that your credit score would still drop. The fees that are tied to mortgage insurance can be paid in monthly premiums or in a single upfront fee. By making a down payment that’s 20 percent or higher than the listing price of the home, you can avoid the fees that come with mortgage insurance.
How to Know if Loan Insurance is Right for You
Loan insurance is only a good idea in certain situations and may not be right for everyone. If you don’t purchase this insurance, there is always some risk that you will lose your job or get into an accident that causes you to miss work for an extended period of time, which means that monthly mortgage payments would be difficult to make. However, you aren’t required to purchase this insurance even when the lender offers it to you.
When you’re thinking about buying this kind of insurance, there are several things you should consider. For one, these insurance policies don’t provide comprehensive coverage and may not be as beneficial to you as term insurance or disability insurance. If you decide to purchase disability insurance, these policies may be able to cover all bills and expenses that would occur after you experience a disability. As for term life insurance policies, these policies can provide money for your loved ones even after you’re gone.
Keep in mind that the costs associated with disability insurance policies and term life insurance policies are usually lower than the costs of loan protection insurance, which is why you may want to choose a more comprehensive policy. If you are weighing all of your options and aren’t exactly sure of which policy to obtain, speak with a real estate agent before making your final decision.