In Part 1 of 3 of my Mortgage Insurance series, I have shared with you why you need to consider having a Mortgage Insurance to protect your Mortgage Loan and not wait till you are able to sell off the property…
And in Part 2 of 3, I have also shared why and when so to start applying for the mortgage insurance and most importantly the underwriting requirements needed for your application. If you have concern about taking a HIV test, I have also shared some pointers to go around it and lastly some basic health tips to ace your medical checks.
In this last part, I will be sharing with you, some of the common suggestions that most of my clients have when it come to their Mortgage Insurance Planning, they know they need it, but they are thinking whether to choose either a Level Term or Mortgage Reducing Term Insurance…
How To Choose Between Mortgage Reducing Term Insurance And A Level Term Insurance?
Basically there’s no right or wrong should you decide to choose either of the plan. It’s only wrong when you decide not to plan for it. But should you need some advice (from me), here’s a few pointers to consider from the two choices…
Choose Mortgage Reducing Term Insurance as first priority because:
- Mortgage Reducing Term Insurance is created because of the existence of a Mortgage Loan. When the Loan slowly decreases, the sum assured decreases as well…
- The premium for Mortgage Reducing Term is the lowest as compared to other types of insurance. Why do you need to pay for more insurance premiums (as compared to taking a level term insurance) when you already have a major bulk of loan repayment to take care of.
- If you have areas like Critical Illness Protection, Survivors’ Protection and Medical Insurance well taken care of and you only have this mortgage loan liability to take care of, paying for a Mortgage Reducing Term Insurance will make more sense. Use the differences to put into a Retirement Planning.
- If you have intention to keep the loan for a short while, getting a Mortgage Reducing Term Insurance will be more value for money. When you have redeemed your loan, and no intention to get new loan, it’s easier to terminate this plan without feeling the pinch. Same issue – plan more for your Retirement or making your money work harder!
The above four pointers are the common ones that I usually use to share why you should consider Mortgage Reducing Term insurance as the first priority for your Mortgage Loan.
Will there be a scenario whereby the benefits of getting a Level Term Insurance outweigh a Mortgage Reducing Term Insurance?
Yes, and they are:
- You have both a Mortgage Reducing Loan and Other Credit Loans. A Mortgage Loan is reducing every year whereas your Credit Loans (e.g. Credit Card, Overdraft) are increasing each year with the compounding interest. Therefore a Level Term will make more sense in covering such liabilities.
- Tight Budget. When you did not do do a proper budgeting, you will face this issue of having tight budget. You do know the importance of being covered and planning for your survivors. As such a Level Term Insurance may make more sense. Even if your Loan is redeemed early, you can still continue with the current Plan. Or due to a Claim, there’ll be more excess left for the Survivors.
- More Than Enough Budget. That’s true! A Level Term Insurance can be used to protect your increasing assets on top of your Private Property, e.g. investment portfolio. Should anything happen, you do not wish to close off all these assets. An Insurance Plan can be well used to cover these.
Therefore as you can see, there are indeed some scenarios whereby a Level Term Insurance can simply outweigh the benefits offered by a Mortgage Reducing Term.
So How To Plan For It?
Every individual has different background and different preferences. To really plan well for this, you ought to discuss well with your trusted Financial Planner. Look through all current plans, calculate all your assets and liabilities or networth. From there, at least you know which Plan is more suitable for you. Remember to do a budgeting as well.
And do remember – it’s only worse when not planned for!