Mortgage Insurance – Reducing or Level Term?
You’ve brought the property. For all the promises and excitement, buying and owning a property brings with it a long term commitment and financial obligations. Just as you are aware that this is not a decision you can “cowboy” through by purchasing the property first and then figuring out how to pay for it later, the next 20 or 30 years of mortgage repayment cannot be left to chance.
It’s time to think of insuring the most financially damaging risk in repaying the mortgage loan – the loss of life of the income earner. Yes, rising interest rates hurt but it’s a minor pain compared to the permanent loss of income.
To protect the mortgage repayment obligation, you should get what is known as “term insurance”. This is a type of insurance which provides a sum of money upon the death or permanent disability of the income earner for a specific period. For example, if the loan is for a period of 30 years, a term insurance can provide coverage for precisely 30 years to match the repayment obligation.
The concept is simple, if nothing unfortunate happens, the loan will be paid off after 30 years. If something unfortunate such as the unexpected death of the income earner happens, the insurance will pay out sufficient funds to pay off the loan. Either way, it is to ensure that the mortgage will be fully paid no matter what happens.
There are 2 types of Term Insurance – reducing term or level term. A reducing term provides coverage that reduces through time, generally in tandem with the loan amount. A level term provides coverage that remains the same throughout.
Both types of insurance will “do the job” but here are some tips to help you decide which is more suitable:
1. No intention to buy another property in the future – Get a reducing term as the premiums are generally lower
2. Intend to buy another property – Can consider getting a level term as the coverage can be used to cover part of the next mortgage loan
3. Expecting more financial responsibilities – Can consider getting a level term if you foresee an increase in insurance needs such as having children in the future
4. Underinsured – Get a level term as the additional coverage can help to cover the current gaps
5. Legacy Planning – Get a level term with the option to convert to permanent or whole-life insurance coverage for future legacy planning needs
Get a Quick Comparison
To help you get started, use this Guide to Mortgage Insurance Premiums (Level and Reducing) to get an indication of how much premiums are required for $500,000 and $1million of mortgage insurance across 3 different insurers. This will provide you with a good indication of how much it will take for you to be insured and the difference in price between a level versus a reducing mortgage insurance coverage.
This short article is intended to provide a quick reference to help you think through some of the issues when it comes to selecting the type of mortgage insurance. There is still no substitute to having a discussion with your GEN Planner and working out the needs in detail as there could be occasions where other types of insurance may be more suitable.
Article by Alan Chong, AFC