Owning a house and raising a family are noble aspirations that could potentially be derailed by unexpected events such as death and disability. Such uncertainty underscores the need to protect what is near and dear to you. Beyond just your family, that includes your property as well. Remember, apart from your children, your house is likely the largest and most important financial commitment you will ever make.
An illiquid asset
The need to protect one's property may not be particularly obvious. After all, property can be sold should the breadwinner pass on. But we have to remember that property is not a liquid asset - that is, it cannot be bought or sold quickly unlike stocks. Searching for a credible housing agent and a willing buyer can be a long drawn and tedious process, not to mention an emotional one given the memories one may have created in the home. In this regard, mortgage insurance can be seen as a way to prevent any unnecessary burden on the family upon the untimely demise of the breadwinner.
Don't over-stretch that life insurance plan
Many Singaporeans confuse the purpose of mortgage insurance with that of life insurance. Many avoid buying mortgage insurance, as it "feels" like they are buying the same plan and believe life insurance will be sufficient to tide the family over in the event of an untimely death or total and permanent disability of the individual servicing the property loan.
The confusion is reasonable, since mortgage insurance is a type of life insurance. While payouts from life insurance coverage in the event of death or Total and Permanent Disability (TPD) do provide some financial relief to dependents, it does not duplicate the role of mortgage insurance in a portfolio.
Ultimately, one needs to face the reality that the payout received from life insurance alone may not be enough to finance the remaining mortgage payments along with the whole host of other daily expenses that the family may incur. To depend on life insurance to singularly meet all financial obligations after death is fool-hardy.
Mortgage insurance is necessary for all aspiring home owners
This is where mortgage insurance can be useful, even necessary for all aspiring home owners.
Mortgage insurance can be structured such that the payout can be used to repay home loan commitments as far as possible, if an unfortunate event happens to the insured. This is a significant relief to dependents, who otherwise may have to bear the financial burden of the remaining mortgage payments. Imagine being saddled with a $600,000 mortgage, upon the death of the main breadwinner.
Also, mortgage insurance does not demand a heavy premium due to its specificity. Yes, standard life insurance can protect one's family from homelessness, but this comes at the expense of higher premiums due to the extensive coverage required. Hence mortgage insurance can be more cost-effective to meet this specific purpose.
More pertinent for private homeowners
While most homeowners would benefit from mortgage insurance generally, it is most essential for owners of private homes. Public sector home owners can fall back on the Home Protection Scheme by CPF Board, which is a government led initiative, though this alone may not be sufficient. However, there is no such scheme for those in the private sector.
Considering that private sector housing generally cost more than public sector homes, it becomes more compelling for private home owners to be proactive and purchase their own mortgage insurance.
Suited for different budgets
Moreover, mortgage insurance need not follow a one-size-fits-all approach. In fact, it can be tweaked to your needs.
Most mortgage insurance plans follow a reducing term assurance structure, whereby the homeowner need not pay for extra coverage since the insurance cover matches the reducing mortgage as closely as possible over time.
Some factors to consider when taking up mortgage insurance include:
- The tenure of the home loan commitment
- The sum assured on mortgage insurance
- The affordability of premiums to be paid, and
- How comprehensive the mortgage insurance cover should be.
If the property is meant for own stay, you can choose to stretch the home loan repayment schedule to the maximum term in order to better manage your cash flow.
There is also a plan that offers full refund of the premium if no claims were made during the coverage term. This type may be more expensive than the usual mortgage insurance but the advantage is that you will get your initial outlay if nothing occurs. Under such a plan, there is also a guaranteed surrender value of at least 75 per cent of the initial single premium paid.
Take the step; protect yourself to safeguard your family's finances
Ultimately, the decision is yours based on what you feel is necessary for your mortgage needs. It is important to note that as a home owner, you need to be protected. A home loan without mortgage insurance protection is like a high-wire act without a safety net.
Don't leave your liabilities open and run the risk of eroding your net worth if an unfortunate event occurs.
Disclaimers
