You have taken up a mortgage loan to purchase your desired property for your family. This is a huge financial responsibility. What happens if an unpredictable event that is beyond your control, such as death, renders you unable to service your outstanding mortgage loan? Do you want to take the risk of your family being forced to sell the property at a loss or worse, go without a roof over their heads?
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Apart from Home Protection Scheme (HPS) which is compulsory when specific conditions are met, Mortgage Insurance is generally not compulsory in Singapore.
Notwithstanding the above, the key question to ask yourself: What happens when you pass on unexpectedly? Do your surviving family members (ex. your spouse, school-going children or elderly parents) be willing or able to continue to service the mortgage loan?
Even if they are willing to take over the mortgage loan, the request may not be approved by the bank / financial institutions as there are conditions that your spouse, school-going children or elderly parents must meet;
If your family members are unwilling or unable to take over the mortgage loan, are you comfortable with them selling the property at short notice regardless of the prevailing market conditions? It is highly likely that the selling price will be depressed and they will suffer a loss. While looking for buyers to ease their cash-flow, they will also need to search for alternative accommodations. This is a highly stressful and unpleasant experience.
Mortgage Insurance works in similar ways as Term Insurance or Whole Life Insurance: when a death or disability claim is made, the insurer will pay out a lump sum to the policyholder and the policy terminates automatically. The policyholder can then utilise this lump sum to pay off the outstanding loan owed to the bank / financial institution.
There are however a couple of key points to take note:
01. The amount payable from a Mortgage Insurance depends on which year the claim is made. For example, the amount payable when a claim is made in year 1 different from year 5, year 10 or year 20. The amount payable reduces every year.
02. Even though the amount payable reduces every year as explained above, the same premium is payable every year. This is an important point that many people overlook when considering Mortgage Insurance with other financial instruments.
The answer will depend on how you define "best": Is the "cheapest" Mortgage Insurance naturally the "best"?
Do take note that not all Mortgage Insurance plans are the same:
01. Some Mortgage Insurance plans reduce the cover on a yearly basis. This means the cover is only reduced at the end of the policy year. Any claim made within the same policy year pays out the same lump sum. For example,
Between 2 March 2022 to 1 March 2023: The same cover of SGD 1,000,000 is payable when a claim is made;
Between 2 March 2023 to 1 March 2024: The same cover of SGD 970,000 is payable when a claim is made;
Between 2 March 2024 to 1 March 2025: The same cover of SGD 955,000 is payable when a claim is made;
02. Some Mortgage Insurance plans reduce the cover on a monthly basis. This means the cover is reduced every month. A different amount is payable for a claim made within the same policy year, depending on which month the claim is made. For example,
Between 2 March 2022 to 1 April 2022: The same cover of SGD 1,000,000 is payable when a claim is made;
Between 2 April 2022 to 1 May 2022: The same cover of SGD 992,000 is payable when a claim is made;
Between 2 May 2022 to 1 June 2022: The same cover of SGD 981,000 is payable when a claim is made;
While all of us want to pay the lowest premiums for a Mortgage Insurance plan, do go through the documents presented thoroughly before making the final decision.
The short answer: "It depends".
The long answer: Term Insurance premiums have indeed come down considerable for the past few years such that more and more homeowners are using Term Insurance, instead of Mortgage Insurance, to protect against their mortgage insurance loans.
Having said the above, several factors are taken into consideration when determining the premiums for Mortgage Insurance and Term Insurance. You should always consider both Mortgage Insurance and Term Insurance before deciding which is the most suitable solution for you.
At Bespoke Wealth, we will always include both Mortgage Insurance and Term Insurance in our comparison so that you can make the best decision for yourself.
Mortgage Insurance is different from Fire / Home Insurance:
Mortgage Insurance pays out a lump sum when a death or disability claim is made. The policyholder can then use this lump sum to pay off the outstanding mortgage loan;
Fire / Home Insurance pays out a lump sum when an insured event (ex. fire, flooding) happens at the insured property and loss is suffered;
If your intent is to protect yourself against a mortgage loan taken up from the bank / financial institution, you should be taking up Mortgage Insurance or comparable instruments (Term Insurance, Whole Life Insurance) and not Fire / Home Insurance.
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