Loan cover term assurance policy is an insurance policy, which covers a home loan. Such a policy covers the individual's home loan amount in case of an eventuality. The cover on such a policy keeps reducing with the passage of time as individuals keep paying their EMIs (equated monthly instalments) regularly, which reduces the loan amount.
This plan provides a lumpsum in case of death of the life assured during
the term of the plan. The lumpsum will be a decreasing percentage of the
initial sum assured as per the policy schedule. Since this is a
non-participating (without profits) pure risk cover plan, no benefits
are payable on survival to the end of the term of the policy.
The premium of loan cover term assurance policy is structured in a
manner to cover the outstanding amount of the loan. Therefore, the size
of the insurance cover declines as the loan's term draws to a close.
Therefore, loan cover term assurance policy has a lower premium vis-à-vis
a term assurance policy that does not provide investment returns.
Some insurance companies have restricted the premium paying term to
two-thirds of the loan's term. This is beacuse, trends indicate that
policy-holders are more inclined to skip paying premium on the
loan-cover policy as the term of the housing loan draws to a close;
maybe due to the relatively small size of the outstanding loan.