Rising property prices: How will it affect your life insurance coverage?

Despite the pandemic, property prices in Singapore are climbing. In 2020, there have been 82 million-dollar HDB transactions, and just in February this year alone, there was a monthly record of 23 million-dollar HDB resale flats sold in Singapore.

If you’re gunning to own a private property and are looking for a bargain during Covid times, you might be out of luck too. Private property prices have risen 2.2% last year despite the pandemic. With more affluent foreign buyers setting their eyes on owning a piece of real estate in Singapore, we can expect prices in the downtown, Orchard and city-fringe areas to increase even further.

Will property prices drop in 2021? As long as Singapore continues to keep the virus situation under control, other factors such as ease of doing business and an excellent government will offer a sense of stability, attracting more to buy homes in the island city-state.

What does this mean for the amount of insurance coverage that you need?

How much life insurance do you need?

Life insurance provides a sum of money to your loved ones when you pass away. To provide peace of mind, this sum should cover your mortgage and other loans, the amount your children need to finish their studies, as well as financial help for your spouse and parents.

A decade or more ago, people usually applied for a life insurance policy with a sum assured in the hundred thousands—for example, $300,000. It would sufficiently cover the remaining mortgage, children’s education fees, and so on.

With rising property prices, as well as incomes, more people upgrade their homes. If you have recently upgraded your home to a private property or a more expensive HDB flat, it means that your mortgage liabilities have increased.

During your working years, upgrading to own a property that will increase in value could be a wise choice. But don’t forget to adjust the amount of life insurance coverage you need, which should cover:

• Mortgage loan
• Car loan
• Any other loan
• Children’s education fees until they reach adulthood
• Financial help for your spouse or ageing parents

As everyone’s financial situation is unique, this sum assured should be customized for you. It will not make sense for you to get the same life insurance coverage as your friend or parents. You have to calculate how much you need yourself, or you can get the help of a professional financial advisor.

Let’s work out how much life insurance you need with a scenario

Mr Tan, 40 years old, has two children—10 and 5 years old. He owns an EC in Tampines, which he purchased at a price of $1 million. He has about $500,000 left in mortgage liabilities. He is also paying down a car loan of $50,000. He contributes $500 a month to help with bills at home. His ageing parents, in their 70s, also take an allowance of $500 a month from him to help with essential expenses.

This is how much Mr Tan should ideally have:

• Mortgage: $500,000
• Car loan: $50,000
• Children’s university fees (local): $200,000
• Children’s expenses until they are adult (assuming $500 per month per child, until 21): $66,000 + $96,000
• Monthly household bills for 20 more years: $120,000
• Allowance for ageing parents for 20 more years: $120,000
• Total: $1,152,000

As you can see, the basic life insurance coverage that Mr Tan needs to cover is $1,152,000. If he owns a larger condominium or a landed property, you can imagine that his mortgage liability will be much higher.

In that case, he should also look out for other insurance plans such as total permanent disability, early critical illness and critical illness plans. This is because when such events happen, they will impact his income, impeding his ability to pay off his existing loans. Having a buffer of financial security can allow his savings to last longer and tide over a period of re-adjustment.

How much life insurance to buy?

After you have calculated how much life insurance you need based on your current financial situation, you should proceed to approach a financial advisor to compare plans and find one that fits your affordability.

How much life insurance coverage you need will change as time goes by. For instance, when your children have reached adulthood and don’t need as much financial support, you can lower the sum assured. Or, you may want to increase it to factor in inflation. Therefore, you need to review your coverage from time to time.

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