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.