Life Insurance for Mortgage


Life Insurance for Mortgage

Life insurance is an essential tool in financial planning that protects the insured person's "human capital", a concept that has existed since ancient times. According to some theories, the practice of betrothal gifts originated in the Western Zhou dynasty. In ancient times, marriage meant that a family would lose a labor force, so as "compensation", the groom was required to provide betrothal gifts. Of course, in modern times, men and women are equal, and betrothal gifts are simply a gesture of goodwill. However, the concept of mitigating the loss of "human capital" is one of the original ideas behind preparing for life insurance.

How is life insurance related to mortgages?

Assuming you are the primary labor force and source of income for your family, if losing your future income would have a significant impact on your family’s finances, sufficient life insurance protection is necessary to mitigate the risk of premature death. To calculate the required amount of life insurance coverage, you can consider the following elements:

  1. First, consider the financial needs of your dependents, such as your children, parents, etc., including current and potential future expenses.
  2. Second, consider any future goals that must be achieved, such as your children’s college education expenses.
  3. Third, consider outstanding debts, such as mortgage loans and any other personal loans.

For Hong Kong residents, the most common debt is mortgage loans, and other debts should also be considered. Finally, review your existing life insurance and asset situation to determine if it is sufficient to cover the above points.

A simple reference formula is as follows:

Extra life insurance coverage needed = (expected dependent expenses + future specific financial goals + outstanding debts) – total value of existing life insurance and assets

Regarding mortgage loans, it is worth noting that under the current property market policies, there is an indirect encouragement to purchase property under a “single name” in order to retain the status of first-time homebuyer. Therefore, when examining personal outstanding debts, one should not only rely on the bank’s statement, but should calculate based on the actual personal burden. For example, if the primary residence is owned by the wife and the mortgage loan is also under her name, but the monthly mortgage payments are actually jointly borne by both spouses, then this debt should not be overlooked when preparing for life insurance coverage. Share Like

Mortgage + Life Insurance = Huge Burden?

Is it a heavy financial burden to pay both mortgage payments and life insurance premiums?

Life insurance protects the insured person’s “human capital”, which is essentially the discounted present value of a person’s lifetime income. Taking into account the various elements mentioned above, the required amount of life insurance coverage is likely to be significant. For example, with the current high property prices, a typical property can easily cost HK$6 million, with a mortgage loan of up to HK$5 million. If we consider the required life insurance coverage for such a property, it would also be at least HK$5 million, which could be seen as a high premium burden.

However, life insurance can generally be divided into two categories: whole life insurance and term life insurance. Term life insurance, also known as “pure life insurance”, has no savings component, and because there is no savings component, the premiums are cheaper than whole life insurance and can be as low as one-tenth of the cost, depending on the situation. For example, Bowtie Term Life charges as low as HK$24 per month for every HK$1 million of coverage. Therefore, the concern that “life insurance premiums are expensive and may add to the burden of daily life” is not entirely accurate. The key is to understand your own financial needs and choose the appropriate insurance product.

  • *Calculation is based on the standard premiums of an 18-year-old non-smoking female

Case Study

Mortgage with Life Insurance vs. Without Life Insurance

Assuming Mr. A is 35 years old and the main source of income for his family. His wife is a full-time caretaker for their two children, and the family’s monthly living expenses are approximately HK$20,000 (after deducting his own expenses). He holds approximately HK$500,000 in liquid assets and has an outstanding mortgage loan of HK$5 million for their primary residence, with a monthly payment of approximately HK$20,000.

If Mr. A unfortunately passes away due to an accident:

Scenario 1:HK$500 thousands Life CoverageScenario 2:HK$8 million Life Coverage
  • Net worth of the inheritance = -HK$4 million
  • Not enough to sustain the current standard of living for Mr. A’s wife and children
  • Net worth of the inheritance = HK$3.5 million
  • Sufficient to maintain the current standard of living for Mr. A’s wife and children for more than 10 years

Of course, the above is just a hypothetical example, and every family should examine their own needs to calculate their required life insurance coverage. If they find that they are underinsured, they should take action immediately!

  • Any content related to Bowtie products in this article is for reference and educational purposes only. Customers should refer to the detailed terms and conditions on the relevant product webpage for information.
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