Home Protection Scheme (HPS) – What is this insurance?
Client: Hey Eileen, I just collected the keys to my new home! Anyway I signed up for this insurance called the Home Protection Scheme. Is it a fire insurance for my house?
Me: No. HPS has nothing to do with fire insurance. It is a mortgage insurance.
Client: What is a mortgage insurance? No wonder I was made to declare my health status! Tell me more about it!
I often have questions and discussions about HPS with clients who are purchasing a HDB property. Some of them are confused over what HPS is and some misunderstand that it as a fire insurance. Most have not heard and thought about HPS (or mortgage insurance in general) until the day of key collection of their flat at the HDB office.
There, they are suddenly briefed about what HPS is and made to declare their health status before signing off the forms. Most will hurriedly get over with all the paper work, as afterall that is what gets in between them and their new house (coupled with all the pineapple-rolling fun). Generally, what I’ve discovered is that most of my clients understand HPS as something that is:
- Compulsory to have
- Premiums are paid using CPF Ordinary account, i.e. no need to fork out cash
- Pays off your remaining mortgage amount in the event something bad happens
What is HPS?
The HPS is a mortgage-reducing insurance that protects CPF members and their families against losing their HDB flat in the event of death, terminal illness or total permanent disability. HPS insures members up to age 65 or until the housing loans are paid up, whichever is earlier. You have to be insured under HPS if you are using your CPF savings to pay your monthly housing loan instalments for your HDB flat (yes it’s compulsory) unless you have applied to be exempted.
Exemption from HPS is possible if you have any of the following:
- Whole Life Insurance
- Term Life Insurance
- Endowment Plans
- Life Riders (must be attached to a basic policy)
- Mortgage Reducing Term Assurance (MRTA) / Decreasing Term Rider.
These policies must cover your outstanding housing loan up to the full term of loan or 65 years old, whichever is earlier, in the event of death, terminal illness or total permanent disability.
For more details, refer to the CPF Website.
Benefits of HPS
In my opinion, HPS is a useful and essential scheme that is suitable for most people. Some of the key benefits include:
- Premiums can be paid from your CPF Ordinary account. The fact that it is ‘cashless’ makes it an attractive option for most people.
- Application is convenient as the application is normally done at the HDB office together with the rest of the administrative matters.
- It covers the basic risks, i.e. Death, Terminal Illness and Total and Permanent Disability that could affect one’s ability to pay off a mortgage.
While HPS is the default insurance scheme when you purchase a HDB property, the option to use private insurance instead should also be considered.
In my opinion as a Financial Planner, these are 3 points to consider if you should have HPS or private insurance to cover your mortgage risk.
1. You want to be able to customise the coverage
It is important to note that the insured events under HPS are:
- Terminal Illness (diagnosed to have less than a year of life expectancy)
- Total and Permanent Disability
HPS does not have the option of extending the coverage to other conditions that could affect one’s ability to continue paying off mortgage, e.g. a Critical Illness (CI).
Being diagnosed with a CI is one of the most catastrophic events that could happen to a new homeowner. In the event of a Critical Illness such as Cancer or Stroke, the new homeowner most likely will not be able to continue working, and as such, the loss of income will render the monthly mortgage liability challenging to meet. In such a scenario, HPS will not take care of the remaining mortgage loan, neither will the premiums for HPS be waived.
A private Mortgage Reducing Term Assurance (MRTA) with CI coverage (may be in the form of a premium waiver or a lump sum payout) will make a lot of sense for most new homeowners as it will alleviate the financial strain in the unfortunate event if one gets diagnosed with a CI so that he / she and the family can focus on recuperating in their new home.
While one may have some form of CI coverage from other insurance plans, it may be insufficient, especially if we are looking at mortgage amounts such as $500,000. It may not be economical to get this level of coverage using a level term insurance, and definitely less so with a whole life plan. A private MRTA therefore offers an affordable way to get CI coverage for the purpose of mortgage protection.
2. You want the coverage to be portable
Unlike private term insurance plans, HPS coverage will be terminated when your flat is disposed of. This lack of portability may pose a problem, especially to younger homeowners who have intentions to purchase a subsequent property. If one has existing health conditions by the time he/she applies for HPS or a private MRTA for the next property, he / she may not be able to get any mortgage insurance if the health is uninsurable. Even if one is able to apply for a mortgage insurance subsequently, it will be more expensive due to age. As such, a private MRTA makes financial sense as it is portable, ensuring that one will have some mortgage insurance when purchasing the next property.
Level-term insurance (where the sum assured is fixed for the term of policy and does not decrease with mortgage paid off) may also be suitable for homeowners who are thinking of purchasing another property in the future as this locks in the premium and insurability for a certain level of protection which does not decrease over time. While premiums are generally higher than that of a MRTA for the same sum assured, the level protection justifies the premium difference in most cases.
3. You don’t mind paying the premium in cash instead of using CPF funds if the premiums are lower
HPS may not always be more affordable than private MRTA. In fact for the same sum assured, there is generally a more affordable option than HPS. I have compiled a guide which compares HPS premiums with private MRTA premiums for the same sum assured for both male and females aged 25 – 35.
While HPS may be paid out of CPF-OA, it is also important to note that you may be paying more than what you need to if you opt to take up a private MRTA.
While HPS is a convenient and cashless way to seek mortgage protection, my take is that it may not be the most suitable for every homeowner as it does not offer the most comprehensive protection and one has to face the risk of being uninsurable for the next property mortgage. If you are intending to do a property upgrade in the future, or having concerns about CI coverage for mortgage, you should be considering a private MRTA.
I have compiled a “Guide to Mortgage Insurance” which comprises different insurance companies’ mortgage reducing term insurance with premiums compared to HPS. The guide also highlights options to attach different riders such as Critical Illness rider.
(NOTE: Get our Guide to Mortgage Insurance to help you better plan for the most appropriate mortgage protection for your home. Get your guide Here)
I hope this guide will be useful in planning to protect your new home, as afterall, there is no place better than home.
Article by Eileen Choo, (ChFC, CLU, FLMI)