Which is Better Protection – Level Term Insurance or Mortgage Decreasing Term Insurance?

Recently, I have been asked by quite a number of my married couple friends during our gatherings, whether they could rely on the Home Protection Scheme (HPS), a Mortgage Decreasing Term Insurance which is administered by the CPF Board, to protect their financial interest in the event of unfortunate circumstances. It is good that we could use our CPF Ordinary Account to pay for the premiums for HPS. However, there are other aspects which we should consider and be concerned about. The table below compares between getting a level term insurance with your private insurer and relying on HPS for your protection needs.

  Level Term Insurance HPS (Mortgage Decreasing Term Insurance)
Types of Coverage Death, total permanent disability and critical illnesses. – Covers any form of debt/liabilities outstanding and provides income replacement. Death and total permanent disability only. In the event of a critical illness, you need to continue with the mortgage repayments.

 

– Covers only mortgage liability for residential property.

 

Transferability – Applies to all types of housing. 

– Coverage remains even if a new property is bought to replace the current one.

 

– Applies to public housing only  

– Coverage is specific to a property:

 

·       If you decide to sell your HDB flat in future and buy another one, the existing HPS policy will be terminated and a new policy has to be purchased.

·       At this time, you will definitely pay a higher premium because of an older age and run the risk of not being insured if any health condition develops.

 

Changes in mortgage repayment/ repayment pattern Sum assured remains constant throughout policy term. 

 

 

·       You need not have to worry about being underinsured if you take up a mortgage with floating interest rate.

 

 

 

·       If you default on loan repayments for a certain period, sum assured remains the same.

 

 

 

·       You can refinance your property without worrying that your sum assured has changed.

 

Coverage is pegged to sum assured, meaning your sum assured decreases as mortgage outstanding decreases. Mortgage interest rate is assumed to be constant over loan tenure.

 

·       In reality, floating interest rates for bank loans will result in a change in monthly repayment aomount. Hence, your outstanding loan may be a higher amount than your sum assured, leaving you underinsured.

 

·       If you default on loan repayments for a certain period, sum assured for HPS continues to decrease during the period, leaving you underinsured.

 

·       If you decide to refinance your property, your outstanding loan may be a higher amount than your sum assured, leaving you underinsured.

 

 

In addition, in the event of a claim, CPF Board will make it compulsory for the lump sum which you are insured under HPS to be fully paid towards clearing your outstanding mortgage.

As for making a level term insurance claim with a private insurer, the lump sum payout which you receive can be used at your own discretion instead of clearing your outstanding mortgage. This would be more flexible in the scenario where the monthly mortgage repayment can be met solely by the healthy/surviving spouse’s monthly CPF Ordinary Account contribution.

Therefore, getting yourself covered with a level term insurance through a private insurer would provide you with a greater peace of mind as compared to solely relying on HPS.

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Author: Wei Lian

I hope that you will find this site useful and informative. Have a nice read!

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