TN Advisory

Mortgage Insurance

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You’ve bought your dream home and it is now your biggest asset. However, the housing loan you took also makes your home your biggest liability. Most people place little emphasis on mortgage insurance while some simply buy mortgage insurance conveniently over the bank counter without careful thoughts and planning. Mortgage Insurance

Two issues arise when buying insurance to cover your mortgage liability:

● You don’t want to overpay for your insurance cover.
● You don’t want to pay for insurance only to discover that the cover you bought has major gaps.

Decreasing Term Vs Level Term

Traditionally, people have bought Decreasing Term for their housing loans. The cover or sum assured decreases steadily over the lifetime of the plan to roughly cover your loan balance as the loan is progressively repaid. Should a claim occur, the insurance proceeds should be enough to pay off the outstanding loan.

The Level Term plan, as the name suggests, maintains a level sum assured throughout the cover period. On death or total permanent disability, the sum assured would be sufficient to pay off the loan and leave a cash balance for the family. This was less popular among buyers, because it is perceived to be more expensive.

In recent years, fierce competition for bigger market share have caused insurers to focus on Level Term insurance. This has resulted in a market anomaly;

Level Term prices have fallen at a far more aggressive rate than Decreasing Term. It seems that in the price war among insurers, the Decreasing Term has somehow gotten ignored. So today, if you compare a Decreasing Term plan with a Level Term plan, the Level Term plan may seem more cost effective. Furthermore, when it comes to death or total permanent disability, the Level Term sum assured would pay off the loan and the remaining cash balance can serve as the retirement or education fund for the surviving spouse.

With aggressive price decreases in Level Term over the past 4-5 years, term prices are now very cheap. Indeed, old term plans should be reviewed for costs savings, assuming you are still in good health. I have seen savings of between 20- 40% even though the client is much older. There is no point continuing with a policy that was bought before the several rounds of Level Term price wars when you can now get the equivalent cover at a cheaper rate, or a more comprehensive cover at the same price. While it may be enticing to switch over to a Level Term plan, there are terms and conditions that you should be aware of. Hence, you are encouraged to seek advice from a financial advisor representative first.

Mortgage Insurance

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What should you be covered for and why?

Death Cover

The insurance payout is triggered on the death of the life assured. If both you and your spouse are working and your respective CPFs and salaries are needed for the home loan repayment, the cover should reflect all this. For some, the death cover also includes certain commitments and future needs of the family such as car loan, child education fund and spouse retirement fund.

Total Permanent Disability (TPD)

The insurance payout is triggered on the life assured being assessed to be totally and permanently disabled. The payment for TPD is subject to limits and whatever that does not get paid out under TPD is paid out on death, if it happens within the policy cover date. Be careful to take note of how insurers define TPD. TPD is increasingly defined as the inability to perform certain number of activities of daily living (ADL) rather than the relatively stringent definition where it is subject to the occurrence of severance of limbs and loss of sight. The inability to perform certain number of activities of daily living (ADL) is derived from Long Term Care insurance, commonly known as ElderShield and CareShield Life.

Critical Illnesses (CI)

I have seen many policies taken out for mortgage protection that did not cover for critical illnesses. From my 15 years in assisting clients with their claims on policies purchased from other representatives, I know that this is a grave oversight. People tend to think that the demise of the breadwinner is the main cause for a family’s inability to pay their mortgage loan. However, I have seen many people lose their homes because the breadwinner contracted a critical illness and their income is disrupted, hence they are unable to service their mortgage loan repayments.

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There Are Generally 3 Types Of Critical Illness Cover So Which Should You Go For And How Much?

Major Critical illness Cover – It pays upon a diagnosis of one of the 37 major critical illnesses defined under the LIA Critical Illness (CI) Framework 2019. This is the cover that should be included in your mortgage protection planning, and it should at least provide for 3 -5 years of income replacement should the life assured contract one of the 37 major critical illnesses.

Early Critical Illness CoverThis is relatively expensive as it pays upon diagnosis of a range of early, intermediate or advanced stage critical illnesses. Price per $100,000 is typically 2-3 times that of normal critical illness cover. This type of cover has been in the limelight as more and more people start to take charge of their health with more frequent health screenings and check-ups. This cover should be considered when the budget has already catered to the major critical illness cover.

Multiple Claims Critical Illness CoverThis is relatively new and more expensive. The cover typically covers for early critical illnesses, a higher limit for advanced stage critical illnesses, and multiple claims across several illnesses’ categories over the cover period. One can claim for early-stage cancer or severe heart attack, and should a cancer relapse occur some years later, make another claim. Premiums per $100,000 of cover is typically 3-5 times more expensive than normal critical illnesses and 1.5 times more expensive than early critical illnesses covers. Similar to early critical illness plans, multiple claims critical illness covers should be carefully considered according to one’s needs, budget and period of cover.

In conclusion, there is no cookie cutter solution for critical illness covers. Take some time to discuss your needs with your financial adviser representative to review your entire insurance coverage. This could potentially reduce your premium costs while providing you similar coverage.

Remember, buying comprehensive mortgage insurance protection for your home is like buying a life vest. You never hope to use it. However, should the boat sink, it must work.Mortgage Insurance


Written by Chan Chong Jin, Wilson (Financial Services Manager from TN Advisory Group)

At TN Advisory Group, our services and expertise can be used to assist interested parties in relation to the various fields of financial planning. Should you decide to not seek advice, do consider if the product in question is suitable for you.

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