RECENTLY, my client Mr Wong called me for mortgage insurance advice. He had just bought a semi-detached house for close to $2 million. He took a loan of $1.2 million over 15 years, and was looking for a mortgage reducing term insurance that will pay off his mortgage in case of his death or total and permanent disability (TPD) while the loan is not fully paid.
Mr Wong told me that he will never forget the time that he and his younger siblings lost their family home when his father died of a heart attack some 30 years ago, leaving his mother struggling to raise the four of them.
Certainly, he does not want this to happen to his homemaker wife and three children.
'When I pass away, the last thing that I would want to put my family through is to also lose the roof over their heads,' he said.
In Singapore, mortgage insurance is not made compulsory for private property owners and those who are not using CPF to pay their monthly HDB housing loan repayments. However, the Home Protection Scheme, or HPS, is mandatory for HDB/HUDC flat owners who service their mortgage loans with CPF funds.
Many private property owners baulk at mortgage insurance either because of inertia or misconception that it's an unnecessary cost. Without mortgage insurance coverage, however, life could be a lot harder financially for the family if things go wrong.
Over the past years, there have been newspaper reports on households having to surrender their private properties because the sole breadwinner passed away without mortgage insurance coverage. As such, I always advise my clients who own private properties to have mortgage insurance to protect their homes and families.
As the name implies, mortgage insurance safeguards your home and family against the unexpected, so that they will not be burdened with mortgage repayments or face the possibility of losing their home. It is available on a single or joint-life basis. If you and your spouse jointly own the home, you may want to consider a joint-life mortgage policy which pays out on the 'first death'.
You can decide how long you want the policy to cover you, but most people have it to run concurrent with their mortgage.
The premium will increase with the mortgage size and the length of your term. In addition, age, gender and whether you smoke are big factors in determining how much you pay. Smokers pay a lot more than non-smokers, simply because they are more likely to make a claim. For example, based on the quotation from a local insurer, Mr Wong will need to pay around 40 per cent more if he were a smoker.
Most of the mortgage insurance plans are reducing coverage whereby the sum assured decreases annually and the rate of reduction depends on the mortgage interest rate and the policy term.
Some of the common benefits and features:
Total and permanent disability (TPD) coverage up to age 70. The policyholder will receive the sum assured in instalments or a lump sum up to $2 million upon diagnosis of TPD;
Single or joint-life coverage is available for joint homeowners;
Premium payment term usually stops a few years before the end of policy term, while you continue to enjoy the coverage;
Option to add waiver of premium rider so all future premiums will be waived upon diagnosis of one of the 30 critical illnesses;
Mortgage insurance does not normally cover critical illness, which means that in the event of a critical illness such as cancer, you will still need to pay the monthly mortgage repayments. Therefore, you may need to buy a separate policy for critical illness cover;
Most plans will not cover any disability caused by riot, civil commotion and terrorist activities.
Buying a home will likely be the largest undertaking you make in your lifetime, so protecting it should be a key part of your overall financial plan. Mortgage insurance will ensure that your dependants will not have the financial worry of trying to find the mortgage repayments or having to sell the property or downsizing in the event of your untimely death.
If you are looking for a mortgage insurance policy, do shop around as premium rates and features offered can vary greatly from insurer to insurer.
The writer is a Certified Financial Planner practitioner. The views expressed are his own
Source: Business Times, 10 Sep 2009
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