Don’t wait till disaster strikes to buy insurance to safeguard your property and home contents

AS SAFE as houses, the saying goes.

Well, not really. Many things could go wrong after you buy your dream home.

The place could go up in smoke or burglars could strike. Or worse, the main breadwinner could die, leaving a mortgage that has not been fully paid.

You do not have to be mired in gloom to consider these possibilities.

The smart thing to do is to take sensible safeguards to ensure that if unexpected events do strike, you will be covered financially.

After all, the purchase of a property involves a big sum of money and is a long-term financial commitment.

The best way to protect yourself is to transfer the risks to insurance firms, which have a variety of policies that provide coverage at affordable premiums.

Property insurance

Banks require home owners to take out property or fire insurance when they grant housing loans.

They want to ensure that the value of their collateral - the insured property - is not jeopardised in the event of fire or other perils that can be insured against.

The proceeds are meant to pay for the outstanding loan balance in the event of a total loss and the owner ceases to service the loan.

For condominiums, the management corporation would have arranged a fire insurance policy against fire and various perils, for the common areas and structural building.

However, this coverage is normally for the building only and typically does not cover your renovation, contents and so on. For example, the risk of loss or damage due to burglary might not be covered.

For HDB home owners who take a mortgage loan with the Housing Board, the latter offers a basic fire insurance scheme that does not cover contents and renovation costs.

Society of Financial Service Professionals president Leong Sze Hian says the low premium of about $60 for five years for the HDB basic fire insurance scheme covers only the foundations, which include the walls and bare floors, as well as standard fixtures and fittings.

Singapore Insurance Institute president Stanley Jeremiah says that many home owners believe they are adequately insured as long as they buy a fire policy.

This is an illusion especially for home owners of new HDB flats, which are usually sold largely bare with just a few fixtures and fittings such as windows and doors.

‘People live under the illusion that they are insured when they are not. This is because they have not included the improvements made to the property, for example, kitchen cabinets. HDB flats come fairly bare, so home owners tend to do extensive renovations after the purchase.

‘The improvements are a big part of the overall costs, which are not accounted for in the fire insurance cover,’ says Mr Jeremiah.

Some tips

How much to insure?

The rule of thumb is that the sum insured should reflect the cost of rebuilding or reinstating the insured property to its original or pre-damage condition, says the General Insurance Association of Singapore (GIA).

The association’s website www.gia.org.sg provides a replacement cost table based on the gross floor area and the type of development for private residential developments. It can be used as a guide for estimating the sum to be insured.

Average clause

If the policy has an average clause, it means that in the case of an underinsured property, any claims payout in the event of a loss might be pro-rated.

For example, assume that the condo is insured for $200,000 and that the cost of reinstating the unit in the event of total destruction is $300,000.

If the condo was damaged by fire and requires $60,000 in repairs, the claims settlement would be $200,000 divided by $300,000 multiplied by $60,000 - so the amount payable would be $40,000.

GIA president Derek Teo advises home owners to review the insured amount at least annually or when renovations are carried out.

No need for double insurance

Purchasing more policies does not necessarily mean you are increasing your coverage.

This is because if there is more than one property insurance policy purchased, most insurers will indemnify the policyholder on a pro-rata basis for the claimable amount, says GIA president Derek Teo.

As a result, the total claim amount is limited to the total cost of the property or reinstatement.

Common exclusions

Policies typically exclude loss or damage caused by infestations of termites, cockroaches, mice or rats in your home, as well as losses of cash, cheques, stamps or damage caused by terrorism acts.

Loss or damage or injuries arising from any dishonest, fraudulent, criminal, malicious acts or omissions are also excluded.

NTUC Income general manager Freddy Neo says that subsidence or landslips are generally excluded although some insurers will cover these if you pay extra premiums.

Home contents insurance

Think of it this way: Property insurance typically covers only the shell of your home. Everything inside can be covered by a separate policy - contents insurance.

This will protect the contents of the house such as sofas, refrigerators, computers and TV sets against risks such as fire, theft and water damage from burst water tanks and floods.

Some tips

Insure at ‘new for old’ or ‘replacement value’

Depending on the wording of the policy, an insurer will replace an insured item in one of two ways.

It will be replaced either with a new similar item, or at ‘replacement value’ - which means the insurer will replace the item with a second-hand one and not a brand-new piece.

Sum insured should reflect the basis of cover

If you want your damaged item to be replaced with a new similar one, then the sum insured should be enough to pay for it.

This is particularly so for luxury items such as jewellery, highly priced art works, antiques and watches, whose prices appreciate over time.

For such expensive items, home owners should consider buying a higher level of contents coverage and declare these items separately. The cover can also be extended to a worldwide basis, subject to conditions.

But if the policy is on a ‘replacement value’ basis, then the sum insured is the second-hand value of the insured item.

Make an inventory of what is insured

Insurer Manulife suggests home owners take the time to compile an inventory list of their home contents.

Useful information that should be noted down includes the model and serial number, if relevant, as well as the date of purchase and purchase price.

These details should be stored in a safe place other than your home. Wherever possible, take photos or videos of the insured items.

Public liability cover

Home owners might want to consider buying a home policy that includes liability cover to protect themselves against lawsuits.

You might need this if, say, your visitor is injured in a fire that occurs at your house or if he slips and falls because your floor is slippery.

Extension of cover

Not all policies cover mudslides, floods and earthquakes. Home owners staying in low-lying flood-prone areas might want to ensure that the coverage of their policies is extended to include floods.

Other coverage to be considered includes protection against loss of use of the home. In this case, a certain sum is provided for the home owner to rent another place while his place is under repair.

Common exclusions

The same exclusions that apply to property insurance apply here.

Mortgage insurance

If the main breadwinner dies or is permanently and totally disabled, the mortgage repayments have to be covered somehow.

A mortgage insurance cover provides for a sum of money to cover the housing loan balance if this happens to the insured person.

One variation of this is the mortgage reducing term assurance policy, which allows the sum insured to be reduced over the loan duration in tandem with the decrease in the housing loan amount.

Some tips

How much to insure?

Decide on the coverage required - the level of coverage, term of coverage and interest rate. This can be based on your mortgage plan.

Next, decide if you would like to choose single or joint coverage. Also, your insurance coverage should be proportional to your responsibility for the loan, says Manulife.

For example, if you are solely responsible for the housing instalments, you should be covered for 100 per cent of the outstanding housing loan. You can also add in a waiver of premium in the event of critical illness.

Assigning the mortgage policy

Mr Leong advises private home owners who take out mortgage insurance policies to take the extra step of ‘assigning’ the policy to the bank which extended the loan. This is to ensure the full sum insured is used to pay off the loan as not doing so could cost thousands of dollars in estate duty.

Many consumers do not realise that if the policy remains ‘unassigned’, then any sum paid out forms part of the ‘moveable estate’ of the deceased, and the proceeds risk being subjected to estate duty imposed by the taxman.

But if the policy is assigned to the bank, there is no risk of incurring estate duty on the insurance payout, so the full amount of the sum insured will be used to repay the bank for the outstanding home loan.

Source : Sunday Times - 15 Jul 2007

Q My Wife and I own a condominium unit, which has an outstanding mortgage.

We pay annual premiums through the bank for a house owner’s comprehensive policy. The coverage of the plan is reduced in line with the loan outstanding to the bank.

The condominium’s management corporation has also bought insurance cover, paid for by condo charges.

How do we ensure that our apartment:

a) is adequately insured against fire and other risks (since the house owner’s comprehensive plan covers only the bank’s outstanding loan); and

b) is not unnecessarily double insured?

A You should check if your house owner’s policy is an all-risks or fire and extraneous perils cover.

The sums insured should reflect the appropriate breakdown for the building/fixtures and fittings, contents and valuables.

The problem with reducing the sum insured as the housing loan balance decreases is that, generally, you may be over-insured in the early years but under-insured in later years.

Whenever possible, the sums should be determined on a replacement basis, that is, replace new for old.

You should note that some policies have an average clause, which means that any claims payout in the event of a loss may be pro-rated for under insurance.

For example, if you under-insured the value by half, in the event of a loss of half the insured assets, the actual claims settlement may be for only a quarter of the actual full value.

Such policies also generally include a public liability cover. This insures you and your family against legal liability for injury or damage to third parties arising out of an accident.

The condominium’s management corporation would also have arranged a fire insurance policy against fire and extraneous perils only, on the entire block.

However, this cover is normally on the building only and typically does not cover your renovations, contents and so on. For example, risks of loss or damage due to burglary may not be covered.

You could consider taking up a mortgage reducing term assurance (MRTA) policy for your housing loan balance.

This would provide for a sum insured payable upon death or permanent total disability of the insured person(s).

Pick an interest rate for your MRTA policy to reflect the expected average interest rate over the duration of the loan rather than your current interest rate, which may be at historical lows.

For example, if your current rate is 3 per cent, you may want to use 5 per cent. Of course, the premium will be higher, but it reduces the risk of a shortfall in the sum insured against the outstanding mortgage.

Also consider arranging a collateral assignment of your MRTA policy to the bank mortgagee.

This may help expedite the claims payout directly to the bank mortgagee, without the need for probate or estate duty clearance, which may cause some minor delays to the claims process.

However, this can take away the flexibility of what you want to do with the insurance proceeds, since the payout will go directly towards paying the monthly mortgage.

Basically, the approach is to cover your risk exposure relating to your ownership of the condominium, keeping in mind that the type and scope of cover should be appropriate, as well as adequate, in quantum.

Leong Sze Hian
President - Society of Financial Service Professionals

Advice provided in this column is not meant as a substitute for comprehensive professional advice.

Source : Sunday Times - 18 Mar 2007