Sunday, July 18, 2010

Protect the roof over your head

It's important to insure home loans in case breadwinner dies early

The house we own is easily a family's biggest of big-ticket items, but only three out of 10 home loan customers here buy mortgage insurance.

While we believe we have insurance for nearly all of our needs, from children's education to hospitalisation, some of us do not realise that our home loans need to be insured too.

Mortgage insurance offers decreasing coverage over the duration of your policy to align itself with your outstanding mortgage loan. Cover can also be extended to cover permanent disability, critical illness and unemployment.

Without a suitable mortgage cover or the means to pay up the mortgage if the breadwinner dies prematurely, the bereaved family stands to lose the roof over their heads should the bank repossesses the house.

Mr Dennis Ng, founder of mortgage consultancy portal Housing, pointed out that although mortgage insurance is compulsory for an HDB flat owner who uses his Central Provident Fund Board savings, it is not a bank requirement for private home owners.

The good news is that DBS Bank and HSBC have started bundling mortgage insurance into some of their home loan packages.

DBS incorporates Aviva's MyProtector Mortgage in some of its schemes, thereby protecting its customers in the event of death, total and permanent disability and critical illness.

Although the insurance does not come free, it saves home owners the hassle of looking for their own mortgage insurance.

Experts believe mortgage insurance is an important part of an overall financial plan.

'This is because our home is most likely our biggest purchase and financial commitment in our lifetime. It is important to ensure that, in the event of unforeseen circumstances, our family members will not be burdened with the cost of outstanding home repayments, or worse, face the possibility of having to sell their home,' said insurance firm Aviva Singapore's chief executive Simon Newman.

This is something the Lee family realised when breadwinner Andrew Lee (not his real name) died from cancer in 2007, leaving an outstanding housing loan of nearly $300,000.

Fortunately, Mr Lee had bought a Manulife mortgage decreasing term plan in 1998 which mirrored his housing loan of $475,000 over a 29-year term. It covered death and total and permanent disability, with the reducing home loan spread out over 29 years. The annual premium was $988.

At the point of Mr Lee's death, the insurance proceeds from his mortgage policy were about $397,000. His family received an initial $150,000 payout from Manulife in 2007. The rest was paid last year when the grant of probate was completed.

The family can pay off the housing loan in a lump sum or continue the mortgage instalments. In this case, there is a surplus of insurance proceeds over the outstanding loan which the family can use for their needs.

If there had been no policy, the family could have lost their home if they were unable to meet the loan repayments.

The policy Mr Lee bought is widely available from most insurers and contains a feature of reducing insurance cover over a period of time.

OCBC Bank's vice-president of wealth management, Ms Anne Tay, said such a feature tries to mirror your outstanding mortgage loan.

'You may start with a $500,000 mortgage on your home but as you make your monthly mortgage payments, your outstanding loan will reduce over the loan period. Accordingly, your mortgage liability will reduce too,' says Ms Tay.

And by providing insurance cover on a reducing term basis, the premium will be relatively cheaper compared to a typical level term-life insurance policy.

Despite the importance of mortgage insurance, DBS Bank's Mr Rick Vargo, managing director of bancassurance, said that only 25 per cent to 30 per cent of the bank's home loan customers have such cover. This is consistent with the overall estimate provided by Mr Ng.

Mortgage insurance is not to be confused with fire insurance which the banks do require home loan customers to take up, and this may be provided free by the banks in the first year.

Tips on mortgage insurance

Home owners should understand their needs first when shopping around for a suitable mortgage cover. Here are some considerations.

1 The amount of cover

Aviva suggests that consumers should consider if they already have existing insurance plans that can cover the outstanding mortgage loan liabilities before buying mortgage insurance.

Some people may decide to buy mortgage insurance to cover a portion of the loan amount as they may have other insurance or other means to meet repayments if needed, said Mr Ng.

'But if you do not have any other funding source, it is best to cover 100 per cent of the loan amount instead,' he added.

Another consideration is whether you want to be covered for just death or to include total and permanent disability, terminal illness and critical illness as well.

2 Buy on a joint life basis

If you own a property jointly with another person, it is prudent to get mortgage insurance on a joint life basis so that it pays out the sum assured if either owner dies. Getting a separate insurance cover for each owner would result in a much higher premium, said Mr Ng.

3 Buy early

Ms Tay observed that there is a tendency for most people to procrastinate and buy mortgage insurance only when they are older. But the older you are, the higher the premium you have to pay.

For example, a 20-year $500,000 mortgage reducing term assurance plan will cost a male property owner aged 50 an annual premium of $2,305. The same policy will cost a 40-year-old male just $814 in annual premiums. The difference of $1,491 is the cost of a 10-year procrastination, she added.

4 Interest rate assumption

The sum assured and the time period of a mortgage reducing term assurance plan are usually matched to the mortgage loan amount and tenure. As the coverage is on a reducing basis, how fast or slowly the loan reduces over time is based on the assumed loan interest rate, which is decided at the inception of cover.

Mr Patrick Lim, associate director at financial advisory firm PromiseLand Independent, noted that some insurers may limit interest rates to a range of say, 3 per cent to 7 per cent, as in the case of Prudential Assurance's PRUmortgage.

On the other hand, insurer TM Asia Life offers a wider range from 0 per cent to 9.75 per cent in even increments of 0.25 per cent.

'It is important for consumers not to be restricted in their choice of a suitable interest rate,' said Mr Lim.

Mr Ng suggests that policyholders assume 4 per cent so that the sum assured will be reduced at a slower pace than a lower interest rate. If the interest rate is assumed too low, there is a risk that the insurance proceeds might not be enough to pay off the outstanding loan.

5 Guaranteed premiums

It is worth checking if the annual premiums are guaranteed upon renewal, said Mr Lim. He noted that in the case of AIA's mortgage reducing term assurance plan, the product summary states that the premiums are not guaranteed.

But this is not the norm as the premiums for the basic mortgage plan are usually priced to be non-reviewable and guaranteed.

6 Check the supplementary benefits

One area of concern is the cap on benefits such as total and permanent disability.

Mr Lim pointed out that permanent disability is capped at $2 million at AXA Life but $3 million at AIA.

Another consideration is when the benefits expire. For most insurers, the total and permanent disability benefit expires on the policyholder's 65th birthday.

Aviva's MyProtector Mortgage extends the benefit expiration to just before the 70th birthday. At Overseas Assurance Corp (OAC), it is the 66th birthday, said Mr Lim.

Also, check the definition of what constitutes total and permanent disability and whether the payout comes in a lump sum or as instalments spread out over a few years. Lump sums are better.

Both Mr Lim and Prudential Assurance's director of product management, Mr Daniel Lum, recommend that consumers go for a mortgage cover that offers to waive the premiums if the insured is diagnosed with critical illness.

Other home-related insurance covers

Besides mortgage insurance, home owners should consider fire insurance that covers the building structures, and home contents insurance. The latter also covers personal belongings that are taken outside the home like hi-fi systems, said the General Insurance Association of Singapore.

Don't burden family members

'Our home is most likely our biggest purchase and financial commitment in our lifetime. It is important to ensure that, in the event of unforeseen circumstances, our family members will not be burdened with the cost of outstanding home repayments, or worse, face the possibility of having to sell their home.'

MR SIMON NEWMAN, chief executive of insurance firm Aviva Singapore

Source: Sunday Times, 18 Jul 2010

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