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 - http://www.ihatetoplan.com/

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.