Articles

1 April 2012

Previously, we shared how mortgage insurance can benefit property owners who buy a property primarily as an investment.

In this final instalment, we share the basics of mortgage insurance for HDB flat owners, as well as some other home-related insurance solutions.

Mortgage Insurance for HDB Property Owners

Mortgage insurance generally refers to insurance plans that insure the life of the property owner or owners. The events that could be covered under such plans include not only death, but also total and permanent disability, critical or terminal illnesses.

This means that if the property owner dies or suffers from any of the above, a lump sum will be paid to the beneficiaries to help settle or service the outstanding mortgage payments. Most mortgage insurance plans in the market are generally known as mortgage reducing term assurance (MRTA) plans. This means that as the property owner pays off his mortgage over the tenure, his insurance coverage also reduces. By having a coverage amount that reduces over the policy term, the property owner pays a lower premium amount as compared to another life insurance plan that provides a constant coverage amount throughout.

For HDB or HUDC owners, the Home Protection Scheme (HPS) is a mortgage-reducing insurance scheme which is compulsory for homeowners using CPF to pay their monthly housing loan instalments. Those not using CPF to pay their monthly housing loan repayment may opt not to have any mortgage insurance coverage.

You may refer to CPF Board’s website (http://www.cpf.gov.sg) for details.

Other Home-Related Insurance for All Property Owners

In addition to mortgage insurance, there are two more types of insurance that homeowners should consider:

• Fire insurance for financial coverage on the cost to rebuild or reinstate the property structure itself (i.e. walls, fences, gates, and permanent fixtures & fittings) to its original state.
• Home content insurance for financial coverage on cost of replacing moveable items in or on the house (i.e. household goods, equipment, furniture, clothing, etc).

Both of these serve a different -- yet important -- purpose in providing peace of mind.

Fire Insurance – Coverage for the building or structure against fire

Fire insurance plans insure against loss or damage to a building or structure in the event of a fire or any other specified peril. If the building structure is damaged, the replacement cost involved in reinstating the home to the original condition could be hefty. Homeowners may have to pay through the nose to repair or restore the property to its original condition. Coverage provided by the fire insurance plan can help alleviate this financial burden.

Typically, there are 2 types of policies, ie named-peril policy or all-risk policy. The difference is the former provides policyholders with coverage only for perils or risks listed within the policy document, whereas the latter provides coverage for all causes of loss except those specifically listed in the policy document as being excluded.

As the actual coverage may be different from one fire insurance plan to another, it is important for homeowners to scrutinize the policy document to better understand what coverage they are getting from the plan.

Of particular relevance to owners of private apartments would be the knowledge that the fire insurance bought by their management committee covers damages to common areas only. Such plans do not cover damages to individual units or content within the units, even though it may be caused by a fire within the building, making the need for additional, appropriate fire insurance by homeowners more compelling.

Fire insurance at a glance

When trying to establish how much coverage is suitable for a property, one should ensure the sum insured consists of the replacement cost (whether specific or estimated), debris removal cost, and architects’, surveyors’ & engineers’ professional fees. Note that the building’s foundation and value of the land will typically not be covered under fire insurance plans.

Homeowners can get an estimate of the replacement or reinstatement cost based on the development type, along with the gross floor area or construction floor area (see table below). For the specific replacement cost, a homeowner may need to seek professional advice from a qualified property valuer or quantity surveyor.

In Singapore, it is fairly common for banks to offer complimentary fire insurance to their mortgage customers for a limited period. Thereafter, the homeowner will be required to continue paying the premium amount (usually annually) in order to ensure continued coverage. The homeowner can buy the fire insurance from a regular insurance agent as well, although there may be fees incurred doing so.

Unlike mortgage insurance plans, the premium amount to be paid is dependent on the estimated cost of rebuilding the property rather than the life insured profile or health condition. Insurance companies may ask a list of questions, which is then used as a basis to determine the premium amount payable. Such questions would be on the details of the property to be insured (i.e. location, construction, description), amount to be insured, whether the property is used for dwelling or business purposes, occupancy of the property (i.e. owner occupied, unoccupied, tenanted), and whether there’s been fire or theft at the property.

Home Content Insurance – Protection of valuable contents in your home

A home content insurance plan generally insures our possessions in the home against loss or damage due to fire, lightning, explosion, bursting or overflowing of domestic water tanks, apparatus or pipes, theft (forcible or violent only), malicious damage, riots, civil commotion, acts of strikers, earthquake, hurricane, cyclone, typhoon, windstorm, flood and aircraft damage.

Although many of the events or perils covered are similar to fire insurance coverage, homeowners should still consider adding on home content insurance plans because the former insures against damage to the building or structure with minimal coverage for the contents of the same building or structure. This may be insufficient compensation for the actual cost of replacing these household items.

Most home content insurance provides compensation for loss or damage to any moveable item, both inside and on the property or home. These household contents include clothing, household equipment (e.g. fridge, television, home entertainment set, BBQ set), furniture (e.g. sofa, beds, dining table), personal effects (e.g. computer, camera equipment) and valuables (e.g. jewellery, watches, paintings, antiques, works of art). In general, the term "moveable item" is key towards comprehending the type of items covered in a home insurance plan.

Most home content insurance plans also provide an extensive suite of benefits which include compensation for loss of rent and cost of obtaining alternative accommodation. Some also include coverage on personal liability which indemnifies the insured person of any legal liability for bodily injury or damage to third party property.

When it comes to home content insurance, homeowners need to pay particular attention to the items and events that are excluded from coverage. Although 2 home insurance plans might have the same perils coverage, their coverage exclusions may be very different.

It is very important for homeowners to scrutinize and understand the policy document to understand the type and extend of coverage we are getting from the plan.

Just as important is to know whether our home content insurance will pay our claims based on "first-loss" and "average loss" basis. These are terminologies particularly common with home content insurance plans.

With a “first loss” insurance policy, the insurance company will pay for losses up to the sum assured without consideration of the actual total value at risk. This means the actual total value of the home contents may be higher than the sum insured. Take, for example, the case of a “first loss” home content insurance plan with $120,000 sum insured. If a flood occurs and the loss in home content amounts to $200,000 (actual value), the insurance company will pay $120,000, as this is the sum stated in the insurance plan.

An "average loss" insurance policy is more difficult to explain. To determine the amount to be paid if an unfortunate event occurred, the ratio of actual loss amount versus the sum insured needs to be estimated. For example, a "average basis" home content insurance plan with $120,000 sum insured but with an actual loss of $200,000 in home content, the insurance company will pay $72,000 (i.e. $120,000 / $200,000 = 60%. Then, 60% x $120,000 = $72,000).

The price or premiums for home content insurance could vary according to the amount of insurance coverage (i.e. sum insured or assured), type of property, basis of settlement (i.e. whether on "first loss" or "average loss" basis), and the other benefits attached to the policy (i.e. loss of rent, personal liability, personal accident).

Building the Perfect Home with the Right Protection

For most of us, choosing the right property is an arduous task. There are hundreds of factors to consider before finally signing on the dotted line to purchase the property. Then again, choosing the right property is only the first step to building the perfect home.

In today’s context, home ownership is not just about having a roof over our heads and ensuring that it is well taken care of. It also involves the responsibility of protecting homes with insurance so that our families are prepared for any unfortunate event that may happen.

In summary, none of us can predict the occurrence of an unfortunate event, whether it concerns the life of the homeowner or just damage to the building structure and interior furnishings. However with the right mortgage, fire and home content insurance plans, it is possible to have some peace of mind against the damages that such events can cause.

Important Information

This material is for general information only. It is not a contract of insurance. It does not constitute an offer to buy an insurance product or service. It is also not intended to provide any insurance or financial advice. The specific terms and conditions of an insurance plan are set out in the policy documents. A person interested in any insurance policy should read the product summary and/or benefit illustration (available from OCBC Bank) before deciding whether to buy the product.

It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Please seek advice from a financial adviser regarding the suitability of any life insurance policy taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the life insurance policy. In the event that you choose not to seek advice from a financial adviser, you should consider whether the life insurance policy in question is suitable for you.

Buying a life insurance policy is a long-term commitment. An early termination of the policy usually involves high costs and the surrender value payable may be less than the total premiums paid.

No representation or warranty whatsoever (including without limitation any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein.

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