INSURANCE FOR HOME LOAN

While my series on stock investing continues, I have to digress to talk about something which happened today morning. Vikrant Deshpande walked into my office and thanked me for some advice I gave him yesterday. It saved him Rs 408,338. The b###er should have at least got a bottle of “bubbly” for me. Levity apart, yesterday he approached me stating that he was facing a financial dilemma. He wanted to take a home loan of  twenty lakhs for his new flat in Pune but wanted to ensure that in case something happens to him (God forbid) his wife should not face a problem.

He said, “The loan provider is willing to insure the home loan but he is asking for Rs172,000 as a one time premium based on my age and other things.”  I thought for a minute and told him to instead buy an  “Online Term Cover” for the amount equal to his home loan. In simple terms, I told him:-

• Go to the web site of either Aegeon Religare  (As per my analysis they provide one of the cheapest rates).
• Check out the annual insurance premium for a life insurance for Rs Twenty Lacs sum assured for a 41 year old smoker (that is Vikrant for you).I said it should be roughly around Rs8,000/- per year.
• Evaluate , decide and buy it.

Now coming to the advantages accrued to Vikrant:-

• He did not have to pay Rs 172,000 in one go. He could simply keep that money in his DSOPF (risk free) earn Rs14,792 per year as interest. Pay his premium from this and still have about Rs7000/- left with him.
• If he had taken the option suggested to him by the loan company, he would get a cover only till his EMIs were being paid.(61 years of age). In the option suggested by me, he got a cover upto 65 years of age. If he wants to terminate the policy the day his home loan is paid, he may do so, the option rests with him.
• In case something happens to Vikrant after 19 years from now (I pray it never happens), the amount of home loan residual would be very meagre, a few thousand of rupees. But in that scenario, Mrs Deshpande would not get anything. Whereas here she gets  twenty lacs which is the sum assured.
• The money saved from premium payment of approx Rs 7000 per annum will become another Rs 408,338 in next 20 years if only left in DSOPF.

The premium, as Vikrant told me in the morning was just Rs6800/- for a non smoker of his age. Since he was a smoker it worked out to around Rs 7,500/- a huge saving nonetheless.

All home loan takers, please understand the purpose of any financial outflow. Investment? Gambling? Expenses? Insurance? Vanity? Money is only a means to an end. Vijay Mallya is justified in spending on a yacht because he wants to park it in Monaco and show his wealth to the Europeans, so is Mukesh by spending on his house Anittilia, he wants to make a statement and for that he is willing to spend even 5000 crores. You also should have a goal or purpose in mind, then and only then, make commitments.

Meanwhile, I had my “bubbly” when Vikrant smiled and “bubbling-with-enthusiasm”  thanked me for a “Win-Win” deal…