Most Singaporeans understand the importance of health insurance or life insurance. However, many of them decide to skip mortgage insurance. This almost always turns out to be a bad idea – it’s possible to have great health and life insurance, but still run into financial trouble because you decided to skip on mortgage insurance. Here’s why.
First, what is mortgage insurance?
Mortgage insurance ensures that your outstanding home loan is paid off, in the event of death, or Total Permanent Disability (TPD).
For example, say you purchase mortgage insurance, to cover a term of 25 years for your home loan. 15 years into your mortgage repayments, you suffer a permanent disability that stops you from working. However, you still owe $200,000 on the mortgage. Your mortgage repayment would then cover the entirety of this remaining amount.
HDB flat owners automatically have mortgage insurance under the Home Protection Scheme. For private property owners, however, it’s up to you buy mortgage insurance to protect yourself.
Why do I need mortgage insurance, when I already have health or life insurance?
Consider the following scenario:
Mr. Chan is a 50-year-old senior manager in a logistics company. His job demands long hours and is extremely stressful. He has a son who is 25 years old and is just starting work after university. His 48-year old wife, Mrs. Chan, takes care of the house and hasn’t been in the workforce for 15 years.
Mr Chan owns a suburban condo, on which he still pays the mortgage. The outstanding loan is around $500,000.
At some point in the year, Mr. Chan suffers a serious stroke. This leaves him wheelchair bound, and unable to wash or feed himself. Continued work is, of course, out of the question.
Now, what happens to the remaining $500,000, which is still owed on the house? Let’s look at three scenarios:
Scenario 1: Count on money from other insurance policies
Let’s assume Mr. Chan has a good Integrated Shield Policy (IP), and good life insurance.
The good news is, Mr.Chan’s hospitalisation and outpatient treatment costs are all easily settled. With a good IP and a rider, he pays only five per cent of this total medical costs. Even if the final sum comes to a whopping $30,000, he pays only $1,500.
(To find out how to be this well-protected, contact us for details).
That’s great news, but how does it help with the house?
It doesn’t. It helps in that Mr. Chan isn’t saddled with steep medical bills, but health insurance isn’t going to pay the outstanding $500,000 owed on his condo.
Next, let’s consider his life insurance. Let’s assume that Mr. Chan has great foresight; when he bought life insurance, he went for a sum assured that would cover seven years of his income.
Mr. Chan earns $7,500 a month – typical for many senior managers – and thus sought for a sum assured of $630,000.
Now, this is, in fact, enough to cover the cost of the house. But doing so would leave just $130,000 for Mr. Chan’s family. His only son, who is 25, is only making entry-level wage, and his wife doesn’t work. While it pays off the house, it leaves the family cash-strapped when it comes to paying for Mr. Chan’s continued treatment, or the need to hire a specialised caretaker. Also, remember that Mr. Chan still needs to go back to the hospital for repeated treatments and physiotherapy. Eventually, the post-hospitalisation coverage from his IP could run out.
Outcome in this scenario:
The health and life insurance significantly reduce the financial damage. However, they’re not enough to also cope with the outstanding mortgage. In this situation, the Chan family would probably have to lose their house and downgrade; even if Mr. Chan was responsible in buying insurance.
Scenario 2: Sell the house, and depend on the resale profits
This solution is extremely luck dependent. Assuming that Mr. Chan bought the house at least 10 years ago, there probably is some capital appreciation. But we don’t know what the property market will be like, at the time they want to sell.
For example, at the time of writing, property prices have been on a more or less steady decline since 2014, and are down almost 12 per cent from the last peak in 2013.
If the Chan family is lucky, they may get a good price. Otherwise, they may even be forced to sell at a loss.
In any case, the advantage is not on Mr. Chan’s side: the mortgage has to be paid every month, regardless of Mr. Chan’s condition. They will probably be pressured to sell as soon as they can, as it’s improbable that Mr. Chan’s working son can handle the repayment.
(Note: a realistic monthly repayment for a suburban condo, on a 25-year lease at 1.8 per cent interest, would be in the range of $3,000 to $3,500 per month. Even with a university degree, a fresh graduate would struggle to pay this).
Even if the house is sold, the Chans will still need another place to stay. Given that $500,000 of the proceeds goes toward their outstanding loan, and that they have lost the main income earner, they will have difficulty securing a new home.
Outcome in this scenario:
The outcome is grim. The Chans need a way to sell the house fast, but also at a good profit; this is not something anyone can safely bet on.
Even after the house is sold, the Chans have to deal with more major problems. At an entry-level wage, Mr. Chan’s son will struggle to find approval for any home or bridging loans the family needs.
There’s also the issue of finding accommodations, while the Chans wait for the sales proceeds and find a new home. This can result in rental costs, as well as inconvenience for the now disabled Mr. Chan.
Scenario 3: Mortgage insurance covers the outstanding loan, whilst other policies cover the treatment costs
As mentioned above, policies such as Mr. Chan’s IP can easily cover the medical bills. But now, consider if he also has mortgage insurance: upon being certified as disabled, the insurance will cover the entire outstanding $500,000.
Mr. Chan’s total costs would be $1,500 for the medical bills, and his family can still retain the condo. If Mr. Chan also has other benefits from life insurance, the payout can go toward providing for his family for many years. By the time the payout is used, Mr. Chan’s son will be in his 30s, and better able to provide for the family. It may even give Mrs. Chan time to re-skill and re-enter the workforce if she so chooses.
The Chan family also have their options open: they can sell the house after the mortgage is paid off, and keep all of the proceeds. They can then downgrade their home to deal with Mr. Chan’s ongoing treatment costs, buy a new home closer to the hospital, or provide a live-in helper for Mr. Chan.
Outcome in this scenario:
As you can see, this is clearly the best outcome of the three. The family doesn’t have to also lose their house, in the wake of Mr. Chan’s tragedy. It also ensures they have a range of options when deciding how to deal with their new living arrangements.
If you’ve carefully planned out your health and life insurance, it doesn’t make sense to skip mortgage protection.
You’ve already carefully put your safety net in place; why risk ruining it by skipping on the easy last step? Mortgage insurance is inexpensive, as its just a form of simple term insurance. Speak to us to compare the best mortgage insurance policies, and complete your family’s financial protection.
