Home Protection Scheme is not what you think it is

Last Updated on 15, April 2014

Home Protection Scheme or HPS for short is an insurance scheme that helps HDB home owners pay for their mortgage debt in the event the borrower dies or is incapacitated. The Home Protection Scheme is often misunderstood. Firstly, it is misunderstood by many borrowers as they think it is like any other insurance product. Secondly, many financial advisers assumes that it has features like any other mortgage reducing term insurance (MRTA) when in reality it is quite a different animal altogether. The lack of a policy document does not help either. Thirdly, when come to estate planning, financial advisers who mistakenly assume it is like any other mortgage reducing term insurance could mistakenly make the wrong calculation in their survivor needs analysis resulting in their clients getting underinsured. Finally, advising on Home Protection Scheme earns no commission, financial advisers do not bother to give their clients accurate information on HPS resulting in disastrous consequences. The following are some points that I listed on the difference between HPS and a normal standalone mortgage reducing term insurance and what you must know:

1. The Home Protection Scheme is a compulsory mortgage insurance scheme underwritten by CPF Board if the borrower is using CPF to pay for mortgage installment for the HDB flat. Exemption from Home Protection Scheme can be done if there is already an existing insurance that is sufficient to cover for the outstanding debt.  Mortgage insurance is not compulsory if you are using cash to pay a housing loan.
2. The Home Protection Scheme terminates when the HDB flat is sold. This is unlike a traditional mortgage reducing term insurance in which the policy remains in-force even if the original property is sold. Termination of the Home Protection Scheme when the property is sold is bad because the home owner could be uninsurable to take up new mortgage insurance/Home Protection Scheme if he or she wishes finance the next property.
3. Besides paying the premium and health declaration, the commencement date of the Home Protection Scheme is dependent on you having obtain legal ownership of the property and executed the loan document with HDB or the approved mortgagee. For a traditional mortgage reducing term insurance, the commencement date is the date of policy inception. The policy inception is not dependent on you showing prove of legal ownership of the property nor showing prove of loan execution. Usually showing the draft copy of the loan agreement is sufficient for underwriting purpose. The different commencement date treatment is significant. For example, if you are buying a HDB flat and during the transaction period got a TPD but has not taken legal ownership but has already executed the loan, you will find yourself with full of debts and no coverage from HPS.
4. There is no policy document for Home Protection Scheme. Thus you do not have a copy of the policy wordings. The “policy wordings” for HPS is actually inside the CPF Act. This is unlike a traditional mortgage reducing term insurance which you will receive a copy of the exact policy wordings. Also for HPS you have no benefit illustration or a product summary. In other words, you don’t really know exactly what you are buying!
5. The Home Protection Scheme “regulated” under the CPF Act, not Insurance Act. This is explicitly stated in CPF Act Section 38 that it is excluded from Insurance Act. Because of this, the Home Protection Scheme is “sold” by CPF Board and thus they are not regulated under the Financial Advisers Act. This implies that if there is any dispute, CPF members have no recourse under the Financial Advisers Act which list out many requirements such as reasonable recommendation and disclosure. I find this to be an important point. Many years ago, I bought a HDB flat and was asked to sign many forms I do not understand. In retrospect, one of the forms was a health declaration for HPS which I did not even know. The officer did not explain to me the importance of the health questionnaires because non-disclosure of material information can render the HPS void. If the officer is regulated under the Financial Advisers Act, I can complain to MAS that the officer breached the Financial Advisers Act and the officer can be fine $25,000 or jail. For HPS, there is no such protection and the borrower would have to hire his own lawyer to fight against the CPF. Will there be any chance? Of course not. Another important point which I believe many CPF officer do not disclose to borrowers are that what I have listed out above: the insurability risk of selling of the property will terminate the HPS and the availability of alternative insurance policies that do not have this problem. Moreover, under MAS regulation, replacement of insurance policy with no good reason is a criminal offence and is called churning. Apparently “churning” is officially permitted under the CPF Act for Home Protection Scheme. So we have an illegal activity legally permitted by CPF. Great.
6. The major point in the Home Protection Scheme is that the home owner is NOT the policyowner of the Home Protection Scheme. My basis of saying this is based on a few points a) A policyowner has the right to assign the policy to another person. Such assignment cannot be done for HPS because HPS is “pegged” to the property, not to the living person b) A policyowner (or his estate) receives the death benefit upon the demise of the life assured. For HPS, upon death of the life assured nobody receive the death benefit. Quite on the contrary, under the CPF Act Section 36, CPF Board would pay the lower of the sum assured or the loan outstanding to the Housing Authority or the mortgagee. Implied in this arrangement is that if the sum assured is higher than the debt outstanding (i.e. an overinsured case), it means that the borrower’s estate will not receive the surplus amount. Having an over insured scenario is possible because of the interest difference assumption in the insurance policy and the actual mortgage interest in which the former is static while the latter is dynamic. Also, the rights of the CPF Board to pay the death benefit to the mortgagee is an evidence that the true policyowner is the CPF Board and thus the borrower has no legal rights to this insurance policy. The borrower is merely the Life Assured. Because of this problem, financial advisers conducting survivor needs analysis must be careful to check that if the Home Protection Scheme’ sum assured is above the outstanding debt, he must use the outstanding debt amount as the sum assured instead otherwise it will be considered a dangerous miscalculation.
7. The treatment of TPD for Home Protection Scheme is radically different from traditional mortgage reducing term insurance. For Home Protection Scheme, upon TPD the CPF Board will service the mortgage loan installments for up to 2 years (Section 36(2)).  At the end of two years, if the TPD is still true, the CPF Board pays the lower of the remaining reduced sum assured (Section 36(6)) or the outstanding debt to the mortgagee. Also if the TPD ceases within the 2 years period, the CPF Board would cease paying the mortgage installment and the borrower is required to resume his installment payment on his own. For the traditional MRTA, the payout of TPD is different for different insurers but they all share the similar payout patterns: Pay in one or two lump sums. If there is a second lump sum, prove of TPD is required before this second payment made. In other words, HPS’ payout pattern for the TPD is the worst of its kind.

Finally, it is almost impossible to get a traditional MRTA form the onset for a HDB loa due to practical problem. To buy a MRTA from an insurer, the draft copy of the loan agreement is required for underwriting. This is normally not available until the completion date of the purchase. Moreover, underwriting can be quick or slow depending on the sum assured, age and any pass medical history. On the completion date, if the MRTA is not incepted yet, there is no prove of insurance and thus the loan execution could not take place. So for practical case, the borrower would just take up Home Protection Scheme first. After which terminate the HPS and buy a separate MRTA. But this is a replacement of policy which is dangerous.

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