During my days as a banker with the various banks, we always offered clients the option of taking up mortgage insurance. I didn’t exactly appreciate the importance of mortgage insurance until one of my colleague’s client passed away unexpectedly. The loan size taken was around 1.6 million and he was the sole bread winner. In the end, the wife has to continue servicing the loan with the monies he left behind.
Uncertainty is a certainty these days; therefore it makes a lot of sense to get your liabilities sensibly covered.
It’s always from hardship stories like these that we come to appreciate the usefulness of all these insurance papers. The tedious filling up of forms, the incessant phone calls from over-zealous agents etc. The entire social stigma about insurance calls and cold canvassing aside, we really need to think long and hard about the true value that insurance coverage brings.
Reducing Term and Fixed Term Mortgage Insurance
There are generally 2 modes of mortgage insurance, Reducing and Fixed term options. Some companies call it Level term instead of Fixed term, effectively they are the same thing.
Reducing Term Mortgage Insurance
In this mode, the sum assured will go down with the outstanding loan size. Usually insurers will waive off the premiums for the last few years as an incentive. This mode is cheaper than its fixed term cousin, and it’s a clean cut no frills mortgage loan insurance.
Fixed Term Mortgage Insurance
As the name suggests, the sum assured is fixed for this mortgage insurance option. The coverage amount will remain constant throughout the policy tenor. It’s a little bit more expensive than the previous option but in the event someone passes on, there is still some pay-out cash left after clearing off the mortgage loan.
For the record, most of my clients opt for the Fixed Term option as it makes more sense in the long run albeit being more costly. All in all it really boils down to your personal needs and budget, but if there is cash to spare, it is never wrong to get a better policy to cover the hefty loan amount.
Fire Insurance and Mortgage Insurance
A very common misunderstanding that clients have is they thought mortgage insurance is fire insurance. There is a huge difference between these 2 insurances in reality.
Fire insurance is usually provided free for the 1st year by the bank when you take up a housing loan with them. It only covers physical damages to your property derived from fire, explosion, earthquake etc.
Differences in coverage between the insurers are common place. Some even covers damages arising from riot and strikes. But the matter of fact is all the above occurrences are far and few between. The conclusion is this, if you noticed fire insurance essentially covers the Banks’ interests. Yes, your property is not yours if you have taken up a home loan. Therefore the Banks’ give you so-called free 1st year insurance to protect their own interests.
Mortgage insurance, on the other hand is a totally different animal. The insurance policy covers the life of the mortgagors in the event of death. Now this is a touchy issue, but a hard fact of life is we really don’t know when we will move on to the next world. Moving on is one thing, but leaving your darling to service the housing loan alone isn’t exactly the end you had in mind.
That’s where mortgage insurance comes in to save the day. The pay-out will be more or less equal to the current outstanding loan amount when you kick the bucket. For a million dollar loan, the annual premium will be around $1000 for a 30 year old non-smoker.
If you ask me, $1000 per annum for $1000000 coverage is a good deal. For those people who want something at the end of the term, I would suggest going for a policy with participating value.
You can play around with our Mortgage Insurance Estimator at https://www.icompareloan.com/mortgage-insurance, alternatively you can email us at email@example.com if you need more information. Cheers! =D