For HDB owners, the Home Protection Scheme (HPS) is something you would be familiar with. If you are using your CPF Ordinary Account to pay for your monthly installment, HPS is compulsory. Over the years, it has benefited many families who were able to fully own the HDB they are staying in, after one of the Co-owners passed away and triggered a payout from HPS. As the name suggests, HPS protects the ownership of your home, in the event of Death, Terminal Illness or Total Permanent Disability.
Should any of the above event happen, the Scheme will trigger a payout which will go towards redeeming your outstanding mortgage, making your HDB fully paid up. This ensures that the family will still have a roof over their head.
Without such protection, it would be possible for families to lose both their loved one, as well as their homes, if the surviving members cannot keep up with the monthly installments. As majority of Singaporeans stay in HDB, making HPS compulsory allows the scheme to have economies of scale and thus premiums are made very affordable. The premiums can be paid using your CPF OA account.
However, Private Home Owners do not have access to the HPS, and thus have to look for alternatives. For private property, there are 2 main types of Mortgage Cancellation Scheme (MCS) available.
Type I: Mortgage Reducing Term Assurance (MRTA).
This type of insurance policy is meant to only help pay off your mortgage in the event of Death, Terminal Illness or Total Permanent Disability. The Sum Assured reduces every year in tandem with your reducing outstanding loan. Towards the end of the policy term, the Sum Assured gets closer and closer to zero. You have to decide on the interest rate to assume for this policy. A higher interest rate assumed will result in a more gradual reduction in your Sum Assured (just like your outstanding loan at any given point will be higher if the actual interest rate you are paying is higher). This type of policy functions similarly to the Home Protection Scheme.
Type II: Level Term Assurance (LTA)
The Level Term Assurance policy is unique in that the Sum Assured remains the same (level) throughout the policy term! Even when it approaches the end of policy term, the Sum Assured is still the same as when your policy first started. When death occurs, the payout will be MORE THAN the outstanding loan at that time, leaving the family with additional cash resources to replace part of the loss of income (due to the premature demise of the Life Assured). It used to be that LTA premiums are much higher than MRTA policies. However, over the years. The premiums for LTA have become so competitive that it’s not uncommon to see LTA premium that is lower or equal to a similar coverage MRTA policy.
Let us take a look at a comparison between a Level Term Assurance and Mortgage Reducing Term Assurance policies.
We are assuming a loan of 1 million dollars at 4% interest rate, and the borrower is a 35-year-old Male Non-Smoker, with a policy term of 30 years. While both policies started with the same $1 million Sum Assured, you will see that the coverage for MRTA becomes lower over the years.
Hypothetically, if there is a claim on the 20th year, the mortgage-reducing term policy only pays out $509,000, which is only enough to cover the loan only. The difference is even bigger on the 29th Year, where the payout is only $110,000.
On the other hand, the Level Term policy will pay out $1 million on year 20, allowing the family to pay off the mortgage, and also provide an additional $491,000 to help the family cope with the loss of one source of income. Allowing the family to not worry about financial problems while they grieve. This huge amount can help tide a family over a few years, giving the surviving spouse a huge relief without having to worry about financial constraints.
In this case, the Level Term Assurance policy is both lower cost than the MRTA policy, and also provides better coverage over time. As such, it makes more sense to consider a Level Term policy as it doesn’t just ensure the home is protected, but also ensures the family’s income is protected, and this protection increases over the years (compared to the MRTA policy).
So, before you commit to a mortgage reducing term assurance, ask for a level term assurance quote for comparison.
On a separate note, it could be worthwhile for owners under the Home Protection Scheme to consider picking up a Level Term policy to cover your mortgage instead!
As always, you will want to keep your expenses as low as possible, and one of the ways is to keep your mortgage interest as low as possible. You can get in touch with our mortgage consultants via the link below for a free consultation! You can even take the savings (through refinancing) achieved and use it towards securing a Level Term Policy for your new loan!