Wednesday, November 20, 2013

Home Insurances

So, under home insurances, I've decided to talk about home contents insurance and mortgage insurance. Although sometimes classified with home insurance, I do not think that I will be talking about maid insurance because it's something that I don't necessarily believe in. The job of maids, not the insurance of them.

Home Contents Insurance

From my understanding, home insurance is different if you're a private landed property home owner. Since in my young lifetime that would be seemingly impossible unless I suddenly become a billionaire, let me focus on condos / HDBs.

For HDB owners, it is required to purchase Fire Insurance directly from HDB's appointed insurer. It costs less than $2 a year and it's valid for 5 years. Honestly, it's chump change. It will cover the standard HDB fittings and fixtures. It's actually a steal of an insurance.

For Condo owners, the Management Corporation Strata Title (MCST) would have taken up insurance to cover fire damage to the building and communal property. Therefore, only renovation and contents ought to be insured for both HDB and condo owners.

I suppose that the basic insurance that all owners should have covers any of the big 3 events, Theft, Fire, Flood.

The insurance ought to cover renovation costs as well as replacement costs, mainly for furniture, clothing and electronics. Personal liability should also be included, in case of any spillover that causes third party damages. Compensation to put up in an alternative accommodation is also a standard feature.

Yup, so those are the basics. Nice add-ons that I have seen includes replacement of locks and keys, and replacement of broken fixed mirrors and glass. Everything else seems kind of hokay, so I personally wouldn't pay premiums to have any other benefits. Especially silly ones, like death benefits, since you ought to be covered properly with a real insurance.

Mortgage Insurance

Mortgage insurance is insurance to cover the outstanding loan amount that you have owing to the bank should anything happen to you, such as death or disability.

Although there are 2 types of mortgage insurances, I will be referring to the reducing mortgage insurance instead of the fixed coverage, which is more suitable for investment properties. Reducing coverage makes the most sense when you're living in that house, because the outstanding loan amount also reduces with your loan repayments.

Currently within the reducing coverage, there are 2 types of insurances as well. They are either non-refundable or refundable (only offered by OCBC). You can get the non-refundable insurance which has lower premiums, but of course, it has no final value. Or you can get the refundable insurance and receive back all your premiums as a lump sum at the end of the insurance, assuming you don't make any claims.

The way I see this, is that the banks are trying to merge insurance together along with forced savings. Going through the refundable route, you'll be able to recover all the premiums paid for the nominal value that they had. I personally feel that the 2 ways pretty much end up in the same position.

If you are tight on cash flow and want a lower capital outlay, have confidence is achieving higher returns, opt for the non-refundable mortgage. You'll will still have suitable cover, as well higher returns for that extra money saved.

If you don't know how to invest your money, or cash flow isn't a recurring problem, but you have poor savings discipline, going for the refundable premiums might be the way to go. At the end of the insurance when you recover all the premiums paid, you'd pretty much were just charged the interest and compounded interest of your capital over those years. If your money was just sitting in the bank, that would have been a good use of your money, because you were insured throughout that period.

At first glance, I was quite impressed by the refunded premiums. However, when I looked at it a bit longer and crunched numbers, I don't think that I would opt for the refundable insurance. With more cash flow, there is more freedom. It gives you a lot more opportunities to taken advantage of market opportunities. Even if not, having a reasonable investment strategy ought to provide better returns. And all these benefits without being any less insured.

I'll just stick to the bread and butter.

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