Cover your life and mortgage

I nsurance is like a safety belt that saves you from the unexpected jerks and hurts in case your ride in life gets a bit unpleasant. It is essential for home owners to obtain insurance for property under mortgage in order to safeguard their asset. We'll see how this decision can avert some of the major crises in your life. But first, the basics.

Why should homeowners have insurance protection? A property purchase decision is related to people's needs and aspirations for a better lifestyle. It could be for own use or investments, including bequeathing to the next generation. The mortgage loan supports a homeowner's aspirations, but has to be repaid before the security can be released. The homeowner's life insurance cover ensures protection to the family in the unfortunate event of his or her death. This is because in the absence of an insurance cover, the mortgage finance balance will have to be settled by sale proceeds of the property.

As straightforward as the need for insurance may sound, it is not easy for people to go ahead and purchase insurance. There are often misconceived notions which prevent people from taking action. One such thought is "it won't happen to me". It is difficult for people to visualise that a misfortune such as death or critical illness could befall them. Additionally, there is ignorance surrounding the consequences of an inadequate insurance protection cover. The most important "asset" for a typical family is the main bread winner; however, people would often give deeper thought to getting insurance for their car or warehouse than for themselves. A closer look at the facts, statistics and daily incidents should open our eyes to the risks surrounding us and our families.

A good way to realise this need is to ask open questions. What would be the consequences on my family if something untoward happened to me? How would my family cope without me? Would they be dependent on parents or friends? What would they have to forgo? Would it mean forfeiting the family house, scaling back children's school, relocating to the home country, sacrificing the current lifestyle, and so on. The answers should be enough to spur homeowners into action.

But then why should one have both Life and Critical Illness Insurance Protection? Life insurance protects against the risk of a homeowner's death. Critical illness protection covers the risk of the homeowner being affected by specified illnesses, such as heart attack, cancer, stroke, loss of limbs, loss of hearing, loss of speech, loss of sight, third degree burns and major organ transplant where he may not be able to earn future income to repay the loans. Both of these are significant categories of risks which need to be insured, where the policy would pay the amount for settlement of the mortgage.

How much protection is required? The mortgage lenders would stipulate that the amount of life and critical illness insurance should cover their loan outstanding and other dues, and the policy be assigned to them. However, a homeowner's total insurance requirement would depend on other factors such as the following:

Typically, policies are available in the following types: Level Term Insurance, Decreasing Term, Whole of Life (WOL). A Level Term insurance covers a specified sum assured for a fixed term, say $100,000 for 20 years, running in line with the mortgage loan of equal tenor. In a Decreasing Term Policy, the sum assured and premium reduces year-on-year, which is ideal for coverage of reducing debts such as mortgages.

The WOL Policy offers a wider rage of rider benefits, flexibilities, longer terms, premium payment terms and the possibility of encashment value, as premiums are invested in funds. Term policies are prescribed by mortgage lenders, as they serve the limited objective of covering the mortgage amount.

However, a homeowner can decide on the Term or WOL Policy, depending on their needs and budget. You can see the fundamental differences between both kinds of policies and decide what category would suit your requirements. What will it cost you? The homeowners can decide on the premium based on several factors, such as these:

How to select an insurance company? The homeowner could look at the following criteria while deciding on an insurance company:

Property - All Risk Insurance covers the risk of damage or theft to the property, and could be considered by homeowners in addition to the life insurance cover. Additionally, a well drafted Will would ensure that the property is passed on in accordance with the wishes of the homeowner. It would be prudent for potential homeowners to engage the services of a qualified independent financial advisor, as there are numerous issues to be addressed. The IFA could evaluate the client's needs, identify the gaps in financial planning, and suggest tailor made solutions to meet the financial objectives, including insurance requirements, in line with agreed budgets. Some insurance pundits have rightly pointed out that insurance is like fun that gets costlier as you advance in age. So when looking at life insurance, the earlier one thinks of it the better.

- The writer is a banking and financial services industry professional. The views expressed in this article are his own