Mortgage Redemption policy vs term policy


What is the Mortgage Redemption policy?
This policy is a loan protector policy which ensures outstanding loan clearance in the event of policy holder’s death. It means the balance amount of loan (generally home loan) will be paid by Insurer Company in case of death.
There are many synonyms like
1) Mortgage Redemption Assurance Scheme of LIC
2) Loan Protector Scheme of ICICI Lombard Insurance
3) Reliance Credit Guardian Plan of Reliance Life Insurance
4) Mortgage insurance of HDFC bank
5) and many more


Does the insurance cover decreases each year?
Yes, if you have taken home loan of Rs.20 Lac and the outstanding principal amount on 5th year of policy is Rs. 14 Lac then the insurer will pay Rs.14 Lac to the respective bank.So, the nominee can own the property with out any outstanding loan now.

What is entry age and maturity age for this policy?
Generally, these policies are issued between the ages of 20 to 50 only. The maximum maturity age is limited to 65.This varies based on insurer.

Is it single premium policy?
Yes, Many insurer forces to go for this option. But, it varies too.

Is there any surrender charges or maturity benefits?
No,it's similar to term insurance.

IMP Question: Should I cover loan with Mortgage Redemption policy or Term Insurance policy?
The obvious answer is term insurance policy because the insurance cover of term policy stays constant during the policy where as it decreases each year in Mortgage Redemption policy. It means the nominee of the policy can pay outstanding loan amount from sum assured of term insurance and remaining amount can be used in future events. So, the property will be free from loan with difference amount will be in hand too as shown below table.


Policy Year

Insurance cover (Lac)

Family Benefits after paying loan dues in case of death (Lac)

Term Insurance

Mortgage Insurance

1

10

10

0

2

10

9

1

3

10

8

2

4

10

7

3

5

10

6

4

6

10

5

5

7

10

4

6

8

10

3

7

9

10

2

8

10

10

1

9

Assumption: Home loan of Rs.10 Lac for 10 Years

Mortgage insurance amount varies based on loan amount



Should I opt single premium mortgage insurance policy included in my Home loan EMI?

For home loans, few banks may force you to take such mortgage insurance policy with home loan in single premium and this amount divided in your home loan EMI. Be careful while selecting such policy because you are going to pay interest on premium amount each year too. Instead, you can put this amount in fixed deposit and pay term insurance premium using interest.

Summary: Protect home loan burden using term insurance instead of mortgage insurance policy.