Mortgage Redemption Insurance and fire insurance in home loans

Under Republic Act 10607, which amends the Insurance Code of the Philippines, fire insurance refers to a contract of indemnity that provides coverage for loss or damage to property caused by fire. (Section 169, Insurance Code)

For purposes of indemnification, the valuation of the property insured, often equivalent to the amount of the outstanding loan, determines the insurer’s liability in the event of a covered peril. (Section 173, Ibid.) Accordingly, in the event of fire, the insurer is bound to indemnify the insured based on the said valuation.

Mortgage Redemption Insurance (MRI), on the other hand, is a form of life insurance designed to protect both the mortgagee (lender) and the mortgagor (borrower) in the event of the latter’s untimely death or total and permanent disability within the term of the mortgage loan.

The proceeds of the MRI policy are applied to extinguish the outstanding mortgage obligation, releasing the heirs of the borrower from any liability.

The primary objective of an MRI is to ensure that the mortgage loan will be fully paid in case of the borrower’s death or total and permanent disability.

It is a common practice for banks to require both MRI and fire insurance when granting a home loan. In the event of the borrower’s death, the existence of an MRI coverage prevents foreclosure proceedings, affording the borrower’s family or the latter’s heirs financial security during a period of loss.

The designated beneficiary of an MRI is generally the bank or lending institution, thereby ensuring that any insurance proceeds are directly applied to satisfy the unpaid loan obligation in accordance with the terms of the mortgage contract.

Alternatively, fire insurance serves to indemnify the policyholder in the event of loss or damage caused by fire. A standard fire insurance policy typically includes the cost of repairing or rebuilding damaged structures. However, in the context of a home loan, the application of fire insurance differs.

In the event the mortgaged property is damaged or destroyed, the insurance proceeds shall be applied primarily to the outstanding loan balance, thereby safeguarding the interest of the mortgagee and ensuring that no financial loss is sustained by the lender.

With respect to the premium, the amount and terms of payment shall be governed by the provisions stipulated in the loan agreement and insurance policy.

It is a prevailing practice among banks to bundle the mortgage loan together with the fire insurance and MRI premiums, the total amount being payable either on an annual or monthly basis, depending on the agreed terms.

Source: Manila Times

Practical financial planning for life's uncertainties

The current global environment reminds us that life can change suddenly. Preparing for those changes is not just wise — it's necessary. Here are some critical financial steps to take now while you still have the time and presence of mind to do so thoughtfully.

Since health risks can emerge at any time, it's essential to gather your important financial documents — such as insurance policies, stock certificates, investment fund certifications and land titles — into one secured location. Also keep digital copies backed up on the cloud.

This makes it easier for your next of kin to process insurance claims or manage estate matters in case something happens. Communicate where and how to access these files to a trusted family member to prevent confusion during stressful times.

While organizing your documents, review your life and health insurance policies. What is the current value of your death benefit? Will it be enough to cover your family's needs?

You can estimate this by dividing your policy's coverage by your family's monthly expenses. If the benefit won't last long enough, you might need to upgrade your plan or purchase additional insurance.

A professional financial planner can help you determine any coverage gaps and identify suitable solutions within your budget.

Leaving your family financially unprepared amid an unstable economy would be a great disservice. Now is the time to ensure they have enough.

Illness or incapacity can strike unexpectedly. It's vital to express your preferences to your partner or trusted individuals about your treatment, funeral arrangements and other personal decisions — such as the type of wake or who should officiate.

If you have children, think ahead. What happens if both parents are gone? Determine who will take custody, how insurance proceeds will be managed and what arrangements should be made. Clearly communicating this reduces stress and avoids conflict during an already difficult time.

In the case of severe illness or coma, who decides whether to continue life support? That burden often falls on grieving loved ones.

By preparing an advanced medical directive or living will, you specify your preferences ahead of time. This removes the emotional strain from your family and ensures your choices are honored. It protects your dignity while giving your family peace of mind.

Many people have found themselves with lower expenses from reduced travel, dining out or entertainment. Use that extra cash to create or grow an emergency fund.

Having three to six months' worth of expenses in savings gives you a safety net. In these volatile times, saving even more is advisable. Keep this fund in conservative, liquid instruments like savings accounts or money market funds for accessibility and capital protection.

Lastly, consider developing multiple income streams. Not only can this supplement your savings, it can also soften the blow if you lose your primary job.

Offer your skills, explore online freelance work, or monetize hobbies like cooking or crafting. Join digital marketplaces or local networks to promote your offerings safely and conveniently.

While we hope for the best, we must prepare for the worst. Strengthen your body and mind. Organize your finances. Communicate your wishes. Establish your emergency fund and income sources.

In uncertain times, preparation is the most powerful protection — for yourself and for those you love.

Source: Manila Times

Breaking down life insurance

Ever been approached by an insurance agent who offered you insurance that you never really understood? I'm sure it happens a lot. More often than not, we get insurance because of the following reasons: the insurance agent is a good friend, and we didn't want to turn him down, or we thought it was an investment. So let's try to give the low down on some basic concepts about life insurance.

There are two major types of life insurance: ordinary life (OL) and variable unit linked (VUL).

Ordinary life insurance. There are two types of insurance products that are classified under OL: traditional life insurance and endowment.

For traditional life insurance, living benefits come in the form of cash surrender values and/or dividends. Cash surrender value is the monetary amount that you would get in case you surrender your life insurance before the policy's maturity. Usually cash values start accumulating by the third or fourth year.

Thus, it will take a while before the cash values grow bigger than the total premium you are paying for. Policy owners can also take loans from cash values of their OL policies. Dividends, meanwhile, are the nonguaranteed cash benefits given to policyholders depending on the insurance company's performance.

The cheapest type of traditional life insurance is a term insurance where one is covered for a certain period of time or up to a certain age only. Term insurance has no cash values nor is it participating in any dividends distribution. However, term insurance can be converted to a traditional life insurance.

Aside from the traditional life insurance, endowments are also classified as an OL product. Endowments are different from traditional life insurance in that after paying premiums, you can periodically receive cash benefits after maturity. It is a good tool for forced savings. Returns are guaranteed but interests in the returns are most often lower than inflation.

OL products also have nonforfeiture options in case you'd like to surrender your policy before maturity and different settlement options for claims.

Variable unit linked. VUL insurance products are probably the most famous insurance product these days. A VUL is an insurance product with an investment component. It is like a term insurance and a mutual fund combined into just one product. Similar to OL, there is a fixed minimum death benefit or face amount. However, since VULs have an investment component, the death benefit can grow as your investment grows.

Unlike OL products, VULs don't have cash surrender values nor dividends. In VULs, a portion of your premium buys you units which have equivalent value called the Net Asset Value per Unit (Navpu). The Navpu changes on a daily basis, thus if you multiply your units by the Navpu, you will get the actual value of your investment or the account value.

A policyholder can regularly add to their investments to their VUL on top of the premium they are paying. These additional investments are called top-ups.

Usually, there are three types of funds where you can invest in: equities fund, balanced fund or bond fund.

Since these are investments, the returns you can get are not guaranteed, but you can potentially earn from 4 percent to 15 percent annually from your investment. Policy owners can also withdraw a portion of their investments but can incur withdrawal charges usually within the first five to 10 years depending on the product.

Note though that even if some VULs are considered limited pay, cost of insurance will still be deducted from your account values. It is advised to make regular top-ups so you won't deplete your account values. Once the account value becomes zero, the policy lapses.

For both OL and VUL, one can also have additional coverage that is called riders. Every insurance product can have different riders. These riders can come in the form of additional insurance coverage for death via accidents and disability due to accident, waiver of premiums in case of disability, critical illness coverage and a lot more.

Having insurance is an important aspect of personal finance and understanding the different types of life insurance products is just one step in picking the right one for you. In case you already have one, it might be a good idea to review its features and see what type of insurance you got. In case you're looking for one, remember that the key to picking the best insurance product for you is making sure it addresses your needs and is aligned to your goals.

Source: Manila Times