Is mortgage insurance necessary in Singapore? My client recently asked me: “Why is there a need to buy mortgage insurance?” If you’ve ever felt like you’re being compelled to do something, getting mortgage insurance is right up there with being forced to clean the house on your day off.
That’s not to say it isn’t important, on the contrary, it’s supposed to provide a rock-solid foundation to your financial plans and protect you and your family against any disastrous outcome.
Is it Necessary to Buy Mortgage Insurance?
When you take a mortgage loan and if you can pay off the loan regardless of any financial situation—cash rich, you may not need mortgage insurance. Here’re four main scenarios that usually resulted in people being unable to service the loan:
- If you’re retrenched or when you’re unemployed (and use up your savings)
- If you fall seriously ill and you’re unable to work in the long term (again, use up your savings)
- If you pass away pre-maturely (and leftover assets unable to pay back the loan)
- If you suffer a severe and permanent disablement (loss of use of 2 limbs) – TPD
And when any of these happens, you and (or) your family will be forced to sell off your home. This is exactly why planning for all four scenarios is critical when you’re thinking about buying your new home.
What is mortgage insurance coverage?
If you’re not sure what you’re getting into, mortgage insurance could be doing you more harm simply because it gives you the illusion that you’re fully covered and if something bad happens to you, your house will be fully funded. This is the response that I get from about 75% of the people that came to me to discuss their mortgage insurance. But, do you know that most so-called mortgage insurance only covers for premature Death, Total Permanent Disability and Terminal Illness?
Even though Terminal Illness (TI) is covered, do you know that it only pays out in the event where you’re only left with less than a year to live? How about other illnesses that may be severe, but you survive after treatment? Wouldn’t this also have a negative impact on your income to continue to service the loan? It is risky to brush it off like that.
What is Home Protection Scheme?
Before we dive deeper, you may be wondering what the Home Protection Scheme (HPS) covers. HPS is a mortgage-reducing term insurance. If you’re buying HDB and using your CPF to fund it, this is compulsory for you. It deducts the premium from your CPF account. Similarly, it covers for Death, TPD and TI.
One thing to be mindful of is when you sell off your HDB and buy a new one, your current HPS will be terminated, and you’ll have to get a new one. Sounds reasonable, right? Well, not so. The loophole here is that if you have a medical condition, it’ll be subjected to CPF Board’s approval to get the new HPS. And yes, I’ve heard of HPS applications being rejected due to medical conditions.
What can you do to prevent your home from being force-sold if you suffer from long-term illnesses?
The key here is to include critical illness cover in your overall planning. This provides another layer of coverage to minimize the possibility of not being able to continue paying your loan, if you fall seriously ill and are unable to work in the long term. Another option is to go for a Disability Income policy that pays you a monthly income if you’re unable to work. Both options are okay, but for disability income, the inability to work has to be certified by the doctor to continue to receive the income. Whereas for critical illness, after there’s a pay out, you can choose to not work or work, depending on your situation
Wouldn’t adding a Critical Illness cover be expensive?
Well, there’re many options you can consider; such as taking up term insurance with critical illness cover, or you can even utilise your existing critical illness coverage to ensure that minimally your mortgage loan can be covered in the event of serious illnesses. In fact, this is the option that I took up myself as well, in addition to having additional Death coverage. If you’re not sure about the differences between a term and a whole life insurance, you can read more about it here.
I hope that this article provides useful insights on how you can ensure that your family home will be protected, and you’ll not leave a burden on your next-of-kin should anything untoward happen to you.