Thursday, August 04, 2011

Home mortgage insurance

Not a lot of people talk about home mortgage insurance, so maybe I should start the ball rolling. This kind of protection is good if you have a mortgage for a property and you want to insure against the risk that you will strike the big three - critical illness (CI), death, total permanent disability (TPD) - while you are still paying the mortgage loan for the property. If it strikes you, then you don't have to pay for the proportion of the mortgage loan that you are covered by the home mortgage insurance. For example, if you opt to cover 50% of the total mortgage loan only under the insurance plan, then when you are struck by the big three, your part of the payment of the mortgage loan will be paid for by the insurance company. If you opt to cover 100% of the total mortgage loan, then the property will be paid fully. Another thing about home mortgage insurance plan is that it is a decreasing term plan. Decreasing means that the amount covered will decrease yearly, which is good because you paid up the mortgage every month so the amount of loan outstanding will also decrease. This should cause the premiums to be cheaper than say a level term. Term plan means that it will stop coverage by a certain age, usually 65 yrs or until the duration of the loan.

Since I bought a resale flat by HDB, they offered me their own brand of home mortgage insurance called the home protection scheme (HPS) offered by CPF. I ran into some problems during the health checkup phase (they sent me a letter saying that because my sum assured was too large, I'll have to go for health checkup) so I wasn't covered by the HPS eventually, though they told me I can re-apply again after 6 months with a report on my health status. That was when I began to check on private home mortgage insurance plans offered by insurance companies.

I found out some interesting observations by making some comparison between the quotations offered and the standard HPS plan. To make it transparent, I was comparing Prudential's PruMortgage against HPS for a 30 yr loan period, 100% coverage of mortgage loan. Here's what I found out:

1. I found out that HPS is more expensive than that by PruMortage. The premium for HPS is 27.1% more expensive compared to prudential. The absolute amount we're talking about is a few hundred dollars (<$200) per year.

2. To make a fairer comparison, I multiplied the premium of both plans by the number of years that you have to pay the premium i.e HPS is 27 yrs and prudential is 30 yrs. I found out that the total premiums paid for HPS is still more expensive than that offered by prudential. It's more expensive than prudential by 14.4%. The absolute amount works out to be 4 digit figure (in my case, it's less than 3k). I just realised that for prudential, there is no need to pay the premiums for the last three years of coverage. This is similar (but not the same) as HPS, which states that the last 10% of the yrs of coverage, you do not have to pay premiums. This means that for shorter mortgage duration (<30 yrs), the total amount of premiums paid for prudential should be lower than that of HPS. For 30 yrs loan period, there is no need to pay premiums for the last 3 yrs of coverage for both HPS and prudential.

I liberally took this from another blog : I hate to plan -

3. Actually, the difference in premiums isn't that much after considering the total premiums paid for both plans (for mine, it's less than 5k difference). But is the coverage similar too? A resolute no. For prudential, you can get a crisis waiver that is somewhat like a CI rider on top of the basic plans. The premiums are waived if the conditions for CI are met. This means that all the big 3 strikes are covered. What about the HPS? They only cover TPD and death. 

4. When the conditions for claims are met, the HPS do not give cash at all. It is paid directly to HDB and you will not touch the claim amount at all. For prudential's plan, you are paid in cash if the conditions for claim are met. This means that the options becomes more varied because you can treat the prudential plan like a normal term plan that insures against your health and death risk, besides insuring against the risk that you're unable to pay for the mortgage loan. I might choose to carry on this plan even after I've finished my mortgage and treat this as a normal term plan. Have to find out if this is possible.

5. The premiums for HPS is paid through CPF, so there is no cash outlay at all. However, the premiums for prudential's plan is paid through cash. I've no CPF contribution at all, so it doesn't really matter to me which payment mode is better. But I do suppose that this could be an important consideration, especially to those who have tight cash flow. If you can pay through CPF, that is one less thing to pay out of your pocket. I believe this could be the ultimate deal breaker to choose between HPS and other private home mortgage insurance plans.

Now, who would have thought that CPF's HPS would be more expensive than private home mortgage insurance plans? I certainly didn't think so. Do take note that I'm not a financial advisor nor do I pretend to be so. Without insulting my readers who are all discerning adults, I wish to lay down my disclaimer. The whole of this article are based on my possibly wrong interpretation of facts and analysis, so if you are interested, do find out more from someone certified and qualified.

*This article is contributed to IM$avvy financial portal, which is managed by Central Provident Fund Board and supported by MoneySense. This site has a noble aim of promoting financial literacy to the general population.


financialray said...

This is one good term insurance that comes with property investment. If something happens, u get a free property (maybe your dependents). If nothing happens, your property is yours after 20-30 years. Even if the property is sold, we can continue to pay premiums for the insurance (not sure about HPS), provided still a big sum to be insured for. So I think we should look at this form of insurance with property investment after having shield plans for hospitalisation.
I am also not an insurance agent.

la papillion said...

Hi financialray,

Yes, i agree :) I checked, it's okay to hold onto the plan even after the mortgage loan is paid up.

financialray said...

Hi LP,

I bought my first whole life insurance for 200k when I was 29.
Then I bought my next whole life with critical illness cover at 34 for another 200k.
Then over last 2 years, lo and behold, our president elect Mr Tan Kin Lian suggested it may be better to buy term. I ponder over and thought he may have a point but I think its silly to give up whole life insurances that i have paid until now. The one I bought in 1999 already has a break even cash value anyway.
Now, I have a few mortgage insurances which I believe are good term insurances.
400k sounds like a lot 10 years ago for whole life but today, I think it can be wiped out by medical costs. 20 to 30 years later, 400k will be like 40k.

la papillion said...

Hi financialray,

Thanks for sharing :) I think getting whole life has its own advantages. I don't think we should outsource our responsibility to experts, even if that expert is a former CEO of a insurance company. I've a feeling he's advocating to the masses.

I can see the truths in his statements, but I just don't think it applies to my particular situation, haha

financialray said...

Hmm, I think LP u are younger than me.
So it is relevant to you.
If you think term is right way to go as you age like me, after having a basic WL, then you need to decide if mortgage insurance is the best type of term for you.
If so, then your next move is to plan for a property investment few years down the road.
A property investment not only provides mortgage insurance, it can also be for retirement planning or as a plan for my children's tertiary education.

Drizzt said...

mortgage insurance is a decreasing term essentially. i written about it some time ago > Decreasing Term Life Insurance can be your low cost insurance solution

la papillion said...

Hi financialray,

I got myself a basic 150k WL coverage (which includes CI), plus another 100k term insurance. I was going to add a few hundred k of term life after my marriage recently. But since I just bought a resale flat and had to have the mortgage insurance, I thought maybe I won't be adding in the term plan and use this one instead for dual purpose.

Haha, so I do have a property right now :) As for a plan for another investment property, that is in the works, but it'll be at least another 5 yrs from now.

Thanks for sharing your experiences with me!

la papillion said...

Hi drizzt,

Thanks, I read that long time ago and also commented on it, haha :)

Anonymous said...

To lend my own experience 6 years ago, buying my HDB.

I did a bit of shopping on this insurance and got a few quote. Only the INCOME offer catches my eye.

Anyway, in summary, on a S$134k mortgage of 30 years, I paid $3000 for as a lump sum payment towards the reducing balance insurance. It worked out to be very much cheaper per year. Had I paid monthly, then it will be until Year 23 where no more payment is expected. PLUS, i got written confirmation from INCOME that if I surrender this policy, eg. sold my flat or no longer in loan, I get the pro-rata premium paid without service charge or penalty.

Oh yes, it is exactly the same coverage as HDB's. Just that I had paid cash for it, instead of charging it to my CPF account (which attracts a 2.6% p.a. interest on this bill).

Naturally, a few friends barked at me for not using the untouchable CPF funds to work for me OR that they don't have the idle cash for so much $$.

Well. I can tell you that I got my pro-rata refund cheque without service charge or replacement policy penalty.


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emelyn said...

Hi, but isn't the Pruterm insurance (term reducing mortgage loan), only for death actually? I checked with my agent, the crisis waiver only waives off the premium in case you get any of the CI, but that still means you need to pay for the mortgage instalments on your property. If you are unable to work, you still have to pay the mortgage instalments, you will not receive the lump sum payout to pay down your house fully. Only when you die, your beneficiary receives the lump sum payout to fully pay for the house.

la papillion said...

Hi emelyn,

The crisis waiver is to waive off the premium, yup. Only in death, will the insurance payout kickoff and u don't have to pay for the mortgage loans anymore. I think mortgage loans insurance is for a different purpose. If your aim is to cover ci, then ci plan or early critical illness plan is the way to go. If you want to cover the possibility of not being able to work due to partial and temporary disability, then disability income is the way to go.

I think even in death,the claims are not paid to beneficiarys. It's paid directly to hdb, unlike say, a whole life or term plan.

emelyn said...

Hi LP, thanks. Do you know of any insurer who offers insurance for CI only? So far the ones I know all have death and TPD with CI, doesn't seem to have CI coverage only.

la papillion said...

Hi emelyn,

I'm not an agent, so I don't know about the products. I doubt there's one that sells CI only. Early CI coverage, yes, I've heard of it, but just CI coverage alone, I don't know any. But as mentioned earlier, I don't know much products in the first place. Maybe you can ask your agent about it?

It's kind of hard to hit CI, so don't over insured on that part.

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