Friday, January 15, 2010

It pays to protect your home

Lorna Tan, Finance Correspondent
Sun, Jul 15, 2007
The Straits Times

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 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.

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