The ongoing Covid-19 crisis is forcing people to make some tough economic choices. In a series of three articles, we’ll look at three such choices you may have to make. In the last two articles, we looked at choosing between continuing your SIP or paying your loan EMIs during the ongoing moratorium, and also looked at choosing between continuing your mutual funds or moving your life savings to the bank. Here’s the third tough choice: if you have to choose between paying an insurance premium or paying your loan EMIs during the moratorium period, what should you choose?
Although both loan repayments and insurance premiums are extremely important ﬁnancial commitments in their own ways, if you were to choose between the two, assuming you’re going through a cash crunch and for the period of the moratorium, you should prioritise insurance premium payments after carefully considering the ﬁnancial implications of opting for a loan moratorium.
The Covid-19 crisis has tremendously heightened various uncertainties. Adequate life and health insurance coverage is one of the few eﬀective ways to safeguard one’s family’s ﬁnances against adverse possibilities such as hospitalisation or death. Your insurance plans lapsing would put your family’s ﬁnances at great risk. The Reserve Bank of India has recently extended loan moratoriums for three more months ending August 31, 2020.
Bounce Back From The Additional Debt
After taking the moratorium, you’re going to accumulate additional interest which makes it more challenging for you to repay your loan. For example, on a loan of Rs. 50 lakh at an interest rate of 8.50% and a tenure of 20 years, your EMI is Rs. 43,391. Assume you had to defer your ﬁrst ﬁve EMIs through the moratorium. This will increase your projected interest from Rs. 54.13 lakh to Rs. 64.82 lakh, and also increase your loan tenure from 240 months to 270 months. Therefore, it is in your interest to proactively reduce the additional debt you’ve created. The way to do this would be to pre-pay a little more than the amount you had to defer. In the above example, if you had deferred ﬁve EMIs totalling Rs. 2.17 lakh, you could simply pre-pay 120% of this amount within 12 months of the last deferred EMI. This would erase the additional debt.
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