Reducing Term Mortgage Insurance Or Fixed Term Life Insurance: Which Is Better?

While both forms of insurance can serve the same purpose, there are different benefits to both. Here are some of the key points to note:

First, how does mortgage insurance work?

Mortgage insurance pays off your outstanding home loan, in the event of death or Total Permanent Disability (TPD)*.

As such, it differs from many forms of insurance, in that the potential pay-out inevitably decreases over time (as your home loan is paid off, the potential payout decreases).

This is what most homeowners are covered with — Mortgage Reducing Term Assurance (MRTA).

With each year that you repay the loan, your coverage will fall in proportion to the outstanding amount owed while the premium stays the same.

MRTA is an alternative to a term life insurance, in which coverage doesn’t change even as your home loan reduces.

*The exact definition varies based on each insurer. However, TPD is often defined as an inability to perform three or more of the Activities of Daily Living (ADL), which are washing, dressing, feeding, toileting, walking or moving around, and transferring (e.g. moving from your bed to a chair)

The difference between MRTA and fixed term life insurance

With fixed term mortgage insurance, there is a fixed payout (the sum guaranteed), and the premiums don’t change.

This is different for MRTA, because as mentioned above, the payout is proportionate to the outstanding home loan, and coverage falls as the loan is slowly repaid.

Consider the following factors in choosing between them:

  1. Term life insurance used to cost more but not anymore
  2. Mortgage insurance doesn’t last as long
  3. With term life, you can pick the level of coverage
  4. Mortgage insurance coverage reduces over time but premiums stay the same

1. Term life insurance used to cost more but not anymore

The premiums for a term life policy used to cost around 20 per cent more than your mortgage insurance (it can be even higher, if you add on other options such as personal accident coverage, critical illness, etc.).

But that’s not necessarily the case right now any more with new products and the changing industry.

As such, some people might buy mortgage insurance, and then focus on other forms of insurance – such as a better health insurance policy, or separate Critical Illness policy – over buying term insurance.

The decision to do this should not be taken lightly; if your outstanding loan amount is low, for example, you will probably have to rely more on term life insurance to look after your loved ones.

Speak to a qualified financial advisor, to weigh this decision.

2. Mortgage insurance doesn’t last as long

Mortgage insurance doesn’t cover as long a period as term life (which can last till you’re 99).

As such, you may not feel it’s ideal if you want a policy for the entirety of your life.

Also, note that if you hold off on buying term insurance now, and buy it when you’re much older, the premiums will be higher.

You may want to lock in a good premium rate while you’re still young, and haven’t got any pre-existing conditions.

3. With term life, you can pick the level of coverage

You can decide how much you want to be covered for, such as whether it’s $1 million or $3 million or even more (it just affects the amount of premiums you need to pay).

For mortgage insurance, the payout is simply enough to cover your outstanding home loan; that’s all.

Decide if this would be enough for your family. For example, you may have a contingency plan to sell the house and downgrade if you pass away or can’t work; in this case, the mortgage insurance pay-out may be all you need.

4. Mortgage insurance coverage reduces over time but premiums stay the same

Most people think that as the coverage for MRTA reduces (refer to point 2), the premiums reduce as well.

That’s unfortunately not the case.

For MRTA, the coverage reduces over time but the premiums stay the same.

For term life insurance, the coverage and premium are fixed from the start, giving you the full benefits even in the future when unexpected events occur.

So… Which should you choose?

There’s no easy answer, as you can see from the above points. Everyone’s situation and needs are different, and that’s precisely why speaking to a wealth planning specialist can help you take the guesswork out.

As Independent Financial Advisors (IFAs), we compare insurance policies from 12 different companies to find the most suitable (and often cheapest) product for you.

Contact us by filling up the form below or WhatsApp us directly at 9642 0757 today.

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