Last Updated on by Tree of Wealth
You’ve bought your first home in Singapore. Congrats! It’s exciting as you get your keys and start your renovations. You might realise that the house cost goes beyond just purchasing it. We’re not talking about renovation woes or getting Taobao’s best furniture.
We’re talking about financing your bank loan. If you’ve taken up a bank loan to purchase a new or resale BTO, an EC or a condominium, it’s time to consider what happens to your housing loan should something unexpected happens to you. Whether transferring the debt to your children or your wife, the chilling thought that they might not be able to continue paying for it is scary. So let’s explore why buying term insurance may be ideal if the unexpected happens.
But first, what happens to a mortgage debt when someone passes away?
Three scenarios can occur when the borrower of the housing loan passes away in Singapore.
The first scenario is that if the borrower does not co-sign the mortgage with anyone, then the executor or administrator of the deceased’s estate(as named in the will) will sell off the property to pay for the loan. But if a co-signer is named, the debt is transferred to the co-signed.
The second scenario is that if the co-signed inherits the mortgage loan, the person will have to hire a lawyer for the Grant of Probate and then discuss with the bank how to continue paying for the house.
The third scenario is if the co-signed cannot pay off the loan. The lending bank can then take possession of the property through foreclosure, so they can sell off the house to repay the debt.
As you may realise, the second scenario is ideal if the borrower has set aside plans for their loved ones to continue servicing the loan even when they are dead. This also applies if the borrower cannot work or their income has diminished due to an accident. So again, it helps to have a financial backup plan so that you and your family will always have a roof over your heads.
What is Term Life Insurance?
Term life insurance is a life protection plan fixed for a certain period, usually up to 70 years of age. It’s a practical solution to protect assets or provide for loved ones in need as it provides coverage for scenarios such as unexpected death or terminal illness. Term life insurance is a common alternative to mortgage insurance when securing one’s home loans.
Top 3 reasons people choose term life insurance to insure themselves for a housing loan
1. Coverage flexibility beyond mortgage repayment
Term life insurance offers a fixed sum payout based on the sum assured. This means you can buy coverage to meet your family’s needs and not just the mortgage repayment. For example, in the case of an unfortunate event such as an unexpected death or terminal illness, the term insurance usually offers a fixed sum payout that would give your loved ones more flexibility to use the funds. So beyond mortgage repayment, your family members can also use any payout to finance hospital bills or loss of income if the insured gets into an accident and becomes permanently disabled. This flexibility helps if the family needs to pay for specific needs such as wheelchairs or disability aids. One example of a term insurance plan is group insurance such as Singlife Elite Term.
Riders can also be attached to enhance any benefits provided by the policy. For instance, apart from death or terminal illness, some term insurance plans include early critical illness coverage riders, so you don’t have to buy a separate critical illness plan. Some insurers even reward the insured with incentives such as reward points to exchange for keeping healthy.
Additionally, the coverage for term life insurance remains the same during the policy tenure and does not cease even with a fully paid mortgage. That provides peace of mind to the insured, who can enjoy protection benefits beyond a housing mortgage.
If you do not get term insurance, you need to know that mortgage loans may not allow you to name your family members as beneficiaries. For instance, if you buy an HDB, you must apply for coverage under the Home Protection Scheme (HPS) if you use your CPF to pay for your house. However, the sum assured goes directly to the creditor, which could be HDB or the mortgagee. So that restricts how your family can use the funds when something happens.
2. Premiums are affordable, and benefits remain the same
Unlike mortgage insurance, where death benefit decreases in tandem while premiums remain the same, term insurance has coverage that remains the same throughout the policy term. For term insurance, the premium you pay is also constant throughout the course, except if you renew or reinstate it.
Besides, term insurance usually has a reasonably affordable premium rate compared to other types of insurance. That’s because it has no cash value at the end of the policy term or upon surrender. So unlike plans with cash value, it does not require further investment or monitoring by fund managers. Consequently, insurance companies can deliver term insurance plans at competitive premiums.
3. Start and continue your term insurance anytime, regardless of the property you buy
There are several different types of mortgage insurance that you can take up, depending on your property type.
For instance, if you buy an HDB, you can apply under the Home Protection Scheme (HPS) if you use your CPF to pay for your house. In addition, you can purchase the Mortgage Reducing Term Assurance (MRTA) if you have private property or an EC.
But when you start working, you might have yet to make plans for the type of housing you want to purchase. You should not wait until you buy a property to get coverage. Therefore, term insurance at this point is a good entry point if you want to protect your health and wealth. As a young working adult, it also assures that if something unexpected happens to you, you will reduce the financial burden on your loved ones in that case.
Besides, your income will increase as you continue to work, so you will want to increase the sum assured by purchasing additional insurance as you grow older. Therefore, by buying your first property, you should consider mortgage property as an add-on rather than your only form of insurance for your housing loan. You may also utilise the same term plan as mortgage insurance for your other properties.
Final thoughts: mortgage or term insurance?
In the next article, we’ll discuss whether you should consider mortgage or term insurance. In the meantime, if you’re wondering which type of insurance provides better coverage, contact our experienced financial advisers at the form below!