Using Insurance as Loan Collateral

This is a very simple policy to set up and is the most cost effective way to insure your mortgage for the remainder of its duration.

Say you have a 30 year mortgage for $300k, the best option for protecting your family and not leaving them with that loan would be to take out a 30 year Term Life Insurance policy for the amount of the mortgage on yourself for. This way in the case of an unexpected death the insurance policy will pay off the mortgage. 

Types of Term Insurance

1. Level Term Plans

• The default life insurance coverage provided by most insurers in India is a level term plan. It is the most common type of term insurance plan.
• In this type of plan, the sum assured selected at the beginning of the policy remains constant throughout the policy term.
• The lower your age while buying a level term plan the lower will be your premium.

2. Increasing Term Insurance

• This type of plan offers the facility to increase your sum assured at specific points in the policy term.
• The rate of this increase is predetermined.
• This type of plan is a great choice for keeping up with rising prices and ensuring that your family has enough funds to sustain after inflation.
• An increasing term policy is best suited for you if you predict a considerable rise in your financial liabilities in the future.
• The tenure for this kind of term plan is usually more than that of other types of term insurance.

3. Decreasing term insurance

• As opposed to increasing term insurance, in this case, the sum assured decreases at a predetermined rate as your age increases.
• It works on the idea that as your age increases, your liabilities might decrease and the need for a higher sum assured too might decrease.
• It is well suited for you if you have taken a loan or a mortgage and expect to pay it off in the near future.

4. Return of Premium Term Insurance

• A new and very popular type of term plan, a return of premium plan, provides you with a savings component, which is generally not offered by term plans.
• In the event that you outlive your policy term, all paid premiums till the maturity date are returned to you.
• The return of premium is made only if you haven’t made any claim during the policy term.

5. Convertible Term Plans

• A convertible term insurance plan is a policy that can be converted into another type of insurance plan at a later stage; for example, a whole life plan or an endowment plan.
• If you expect your financial priorities to change in the coming years, you can opt for this type of term plan.
• For instance, if you are currently risk-averse, but expect to become more flexible in that regard, you can opt for a term plan that can be converted into a whole life plan.