No More Housing Woes: Term Life Insurance or Mortgage Insurance
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Term Life Insurance vs Mortgage Insurance

Being a homeowner is one of the major milestones in life, which many people strive towards along the path of true adulting. If you are a soon-to-be homeowner, you may realise that the costs of a house lies beyond the purchase price, and there’s always the “what if” to think about.

What if you are unable to finance your mortgage loan due to an unexpected event (touch wood!)? Let’s face it, your property would likely be one of the most expensive assets that you purchase in your lifetime, and it is common for people to take up loans for the housing purchase. However, in the unfortunate event when a homeowner passes away during his/her home loan tenure, the duty to service the loan will be transferred to their loved ones. To protect our loved ones from unexpected debts, mortgage insurance or term life insurance are tools that we can consider. If you have been wondering which option to choose, read on for further insights on mortgage insurance and term life insurance.

What is Mortgage Insurance?

Commonly offered as Mortgage Reducing Term Assurance (MRTA) in Singapore, mortgage insurance ensures you that you can service your mortgage repayment for the entirety of your home loan tenure in unforeseen events such as death or total permanent disability. In simple terms, mortgage insurance is your back-up plan to ensure that your family and loved ones will always have a shelter over their head and not be laden by housing debts in unforeseen circumstances. In the unfortunate event of your demise, mortgage insurance shall pay the balance of your mortgage.

Do you see the importance of planning for unexpected events now?

Credits: GIPHY

In fact, mortgage insurance is so important that HDB buyers are mandated to be on the Home Protection Scheme (HPS) – a mortgage-reducing insurance – if they are using CPF funds to repay their home loans. One can only be exempted if you have MRTA, life insurance or endowment policies substantial enough to cover your outstanding housing loan up to the full term of loan or 65 years old. Although mortgage insurance is optional for homeowners of private residences, one is highly recommended to be insured and some banks may tie up with a mortgage insurer and offer more attractive loan interest rates.

What is Term Life Insurance?

Term life insurance are life protection plans that are fixed for a certain period, and these are practical solutions to protect assets or provide for loved ones in times of need. Term life insurance is a common alternative to mortgage insurance when it comes to securing one’s home loans.

Why do people choose term life insurance over mortgage insurance?

Flexibility in the form of a fixed sum payout

Whereas that payout for mortgage insurance is attached to housing debt, term life insurance offers a fixed sum payout based on the amount that you have insured for. This means that you can buy sufficient coverage to meet all of your family’s needs, and not just the repayment of the mortgage. Having a fixed sum payout gives your loved ones the flexibility to use the funds to their discretion.

Benefits paid to your beneficiary instead of your creditor

One of the main differences between mortgage insurance and term life insurance lies in the claims payout to potentially different entities. The former is pegged to one’s mortgage loan, and claims that is meant to pay off the remaining mortgage shall be paid to the policyholder, which could be the creditor. On the other hand, benefits of a term life insurance will be made to you or your beneficiary, and they can deem fit to use the funds according to their immediate needs.

Perceived greater value as compared to mortgage insurance

Mortgage insurance is tied to the balance on your mortgage — meaning the death benefit decreases in tandem, even though your premiums will likely remain the same. On the other hand, the coverage for term life insurance remains the same during the policy tenure.  For this reason, many have the perception that mortgage insurance’s value is lesser than that of standard term life. In actual fact, you get what you pay for.

Credits: GIPHY

Term life insurance may not necessarily be cheaper than mortgage insurance, although you may get lucky with the right plan that suits your needs. So which is better?

Mortgage Insurance vs Term Life Insurance

Here’s a list of considerations to think about when you are choosing between term life insurance and mortgage insurance as a backup for your housing loans.

Consideration Factors

Mortgage Insurance

Term Life Insurance

Main coverage / benefit

Mortgage loan

  • Coverage will reduce over time

Life protection

  • Coverage will remain level throughout policy term
Limits on sum assured Maximum up to mortgage loan amount Based on your preferred amount, subject to insurer’s allowed limits
Renewal premium Premiums tend to remain the same while coverage reduces Premiums and coverage remain the same in a fixed period
Claims recipient Policy owner (i.e. could be the bank, or insured person) Appointed beneficiary
Convenience
  • If you shift premises, mortgage insurance can usually be transferred to a new property. Note, this does not apply to HPS.
  • Flexibility to add-on coverage for critical illnesses
  • The coverage is attached to you, and not your property, so you are insured even when you shift premises
  • Flexibility to add-on coverage for critical illnesses
Concerns
  • Mortgage loan interest follows a fluctuating interest rate while an MRTA’s sum assured reduces based on a fixed schedule of interest rate instead. Hence, it’s possible that there’s a deficit in coverage should there be a rise in interest rates or when the loan borrower skips a few loan installments.
  • Possibility of insufficient coverage as one gets to decide on your own coverage
  • Policy term should cover the length of the mortgage loan

 

Find out more about mortgage insurance here: http://po.st/eprotect-mortgage

Find out more about term life insurance here: http://po.st/eprotect-termlife

Be it mortgage insurance or term life insurance, proper planning and protection is essential to counter unexpected events in life. We hope this article has given you a clearer idea of your choices for protecting mortgage loans.