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 PresidentSociety 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
