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Protect the roof over your head

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

The Business Times - July 18, 2010
By: Lorna Tan

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Protect the roof over your headILLUSTRATION: LIM YONG

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.

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.

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