Last Updated on by Tree of Wealth
Buying a home is one of the most significant investments you’ll make in your lifetime, so it’s important to have the right protection in place. Have you ever thought about how much it would cost to replace your house or pay off your mortgage if something happened to you? What about your family’s future? Mortgage or term insurance is a great way to protect your home and family. It’s also an excellent way to get the coverage you need at a price you can afford. But what is the difference between mortgage vs term insurance?
When initially deciding whether to get insurance, knowing the best option for your needs can take time. So in this article, we’ll cover the differences between mortgage and term insurance so you know which suits your needs.
What is mortgage insurance?
If you have a mortgage, mortgage insurance can help protect it against death and disability. In addition, this can help you avoid foreclosure if anything should happen to you or your spouse so that you don’t have to worry about keeping up with your payments.
Commonly offered as Mortgage Reducing Term Assurance (MRTA) in Singapore, the insurance has a sum assured equivalent to the mortgage loan amount for the sum insured, the property owner. This amount reduces over time – hence the name – according to the loan amount and interest rate. You can view mortgage insurance as a backup plan so your loved ones will always have shelter over their head and not be burdened by housing debts in unforeseen circumstances. In the unfortunate event of the lender’s demise, mortgage insurance pays the mortgage balance. Some examples of MRTA are NTUC Income Mortgage Term and Tokio Marine Mortgage Protection.
Is mortgage insurance compulsory in Singapore?
For HDB homeowners, mortgage insurance is compulsory for those who use their CPF savings to fund the housing loan. It’s known as the Housing Protection Scheme (HPS), a mortgage-reducing insurance that settles the housing loan if there is a claim.
It is still highly encouraged for those who use cash for HPS to buy HDB flats. However, only HDB homeowners with MRTA or other life insurance policies covering the outstanding housing loan up to the full term are exempted. This shows how important mortgage insurance is to the Singapore government.
HPS is not available for private property owners. They can purchase mortgage insurance independently. So no, while it is not compulsory for everyone, it certainly benefits all homeowners!
What is term insurance?
Term or term life insurance is a type of insurance protection plan that covers for a specified time and has a set sum assured. If something unforeseen, such as unexpected death or terminal illness strikes the insured during the coverage period, there is a lump sum payout. Should all be well and good, the insurance ends its coverage at a certain age, and there is no maturity value once it ends. Some examples include Singlife with Aviva term insurance and AXA Term Protector.
Some people consider term life insurance more attractive than mortgage insurance when protecting their housing investment. So let’s look at three things to consider when you are deciding between both:
Term life insurance or mortgage insurance?
1. Who does the insurance benefit?
The key difference between mortgage and term insurance lies in its beneficiary in case of a claim.
For mortgage insurance, claims payout is usually made to the policyholder. This policyholder could be the creditor. This means if something should happen, any claim payout will go to the creditor of the loan instead of the insured. It also means that any claims payout is solely used for the house.This is the case with the HPS. Of course, many MRTA plans allow the insured to nominate beneficiaries to receive the payout. Therefore, even if you are eligible for HPS, consider that an MRTA plan allows you more flexibility when considering who the insurance will benefit.
For term insurance, however, the payout will go to you or your nominated beneficiaries. So they can choose how they want to use the funds according to their immediate needs.
2. How much can I get if something happens?
When planning for the future, you might have a number in mind when weighing the potential costs. Mortgage insurance cannot help you with these expenses. That’s because mortgage insurance is tied to the loan amount. For example, if you are calculating whether your child can still go to university should something unfortunate happens, mortgage insurance is not going to help you fund that amount. Because the payout is strictly for the outstanding housing loan amount and to help you or your loved ones if you cannot finance the housing loan anymore.
On the other hand, term insurance offers slightly more assurance as you can purchase term insurance with enough coverage for your family’s needs. For example, you can choose how much you need for sudden death, disability, or terminal illness. Some insurance plans may even offer a higher sum assured when you opt for specific add-ons such as cancer coverage. That shows that term insurance gives you more leeway when planning to manage your family’s finances. If, for example, you think that your spouse can cover the outstanding amount, then your family can use the payout for your child’s university fees instead.
3. How long am I being covered?
Mortgage insurance coverage reduces as your outstanding amount diminishes. Therefore, your coverage decreases as years go by. Any death or disability benefit will decrease accordingly, even as your premiums remain the same. MRTA plans allow you to transfer the plan to your house if you move. For homeowners who are protected under HPS, unfortunately, they cannot transfer HPS plans to a new home. This means the possibility of settling for less coverage if medical check-ups show new health conditions at the point of medical unwriting for the new plan. Additionally, there is also a chance that those with severe health conditions might not qualify for HPS at all and have to fall back on their CPF savings.
Term insurance, however, will remain the same throughout the policy coverage. This is because premiums are calculated based on your age when you buy the insurance and remain level throughout the coverage. Additionally, the insurance is for you, not your house, so you continue to be covered even as you move.
For example, if you currently stay in an HDB and know you will purchase a private property in years to come, you should purchase term insurance instead. While your mortgage financing is low for your current home, your outstanding loan will increase when you move to a new home. The key is, with term insurance, you can get a higher sum assured of 1.5 million – 2 million, so you do not have to purchase a new term plan. Apart from that, as a person grows older, inevitably, new health conditions might arise. Therefore, getting a term plan rather than multiple mortgage plans when you are young, fit and healthy is more favourable so that you do not have to worry about being excluded or paying higher premiums if things change.
Besides, premiums for term insurance are usually relatively similar to mortgage insurance. You must compare and see what suits you and your budget best.
4. What else to consider?
Lastly, consider how term insurance may not offer you enough coverage for your housing loan. For example, if you’ve taken out a housing loan for 35 years, your term insurance must also provide the same, if not slightly longer cover duration.
For MRTA, your sum assured amount reduces based on a fixed interest rate schedule at the point of purchase. However, if your mortgage loan interest follows a floating rate, there could be a deficit in the insurance payout if interest rates go beyond the fixed rates. Additionally, since the death benefit is the least in the last year of the MRTA, there is also lesser coverage. On this note, term insurance will provide more assurance since coverage remains the same.
Overall, both mortgage and term insurance can help protect your family’s financial security by ensuring they can still afford the home you worked so hard for if something happens to you. But if you are still unsure which is better, talking to an experienced financial advisor can help you make a wiser decision.
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