When you choose to purchase a home in Japan it is the ultimate commitment to your life overseas. The obligation to repay the mortgage could run anywhere from 20 to 35 years and as we know, a lot can change in life over that period of time. Unexpected death can be devastating for a family whose home is still under mortgage. There is one sure-fire way to remove the risk of your family having to find thousands or even millions, to repay the bank in the event of your untimely death- life insurance.
With a life insurance plan you would choose a “death benefit” that equals the amount of your outstanding mortgage (or any other loan that you have). If something happens to the holder of the loan (you) then that money is paid to your family by the insurance company, enabling them to pay-back the bank and live in the house free and clear of any debt, and with nofurther obligations to the bank.
The Japanese Mortgage
For most Japanese mortgages, the loan amount will be a sum that decreases over time at a standard rate. For example, you pay 200,000 JPY each month for the next 35 years (the typical maximal length of a Japanese mortgage), and the home is yours at the end of that time. There are other situations when you may have an Adjustable Rate Mortgage (ARM), which hs a variable rate of interest depending on a central bank benchmark rate. This kind of mortgage will require you to pay a different amount depending on the current benchmark’s rate which will be revised intermittently. Finally, you may have a balloon payment structure where initially you pay a defined amount, but at the end of a specified time period, usually 10, 15, or 20 years you will pay a large (balloon) payment. Some mortgages will be a combination of the previous structures; however, these structures are more common outside of Japan.
No matter what the structure, an uninsured loan of this size, secured against your family home is a large liability. The remedy to this risk is insurance. In Japan, for a standard residential mortgage, banks will usually require the co-purchase of “Group credit life insurance” (団体信用生命保険, Dantai Shin’yō Seimei Hoken) to obtain a mortgage. This is a type of “Term life insurance,” which is insurance that has a limited “Term” (time period) in which it is valid. If you were to pass during this term, then the insurance company pays your beneficiaries the amount defined in the policy. If you live to complete the term, the company is not required to pay anything, but with some term policies, you can sometimes renew your policy but will likely have to pay a higher premium rate for the renewal to account for your increase in age.
Group credit life insurance is term insurance that pays off your mortgage at the current value owed. The western name of this type of insurance is “Decreasing Benefit Term” or, more specifically, “Mortgage Life Insurance”. If you are buying a home in Japan or elsewhere, we recommend this type of cover as it is often the cheapest way to insure your family where the only financial outstanding liability is the mortgage on the family home.
There are eight illnesses that can keep you from obtaining group credit life insurance:
- Acute myocardial infarction
- Hypertensive disease
- Chronic pancreatitis
- Chronic kidney disease
If you have any of these illnesses, you will have a more challenging time obtaining the Group Credit Life Insurance and thus a mortgage, but some workarounds are possible though more costly.
There are a few situations where some Japanese banks will not require Group Credit purchase, the notable exception is Flat 35, which the Japan Housing Finance Agency offers and does not require it. Other banks will require and offer the insurance, but do not require that you buy your insurance through them. In any of these situations, we recommend that you shop for a better price for the same coverage or better coverage. Japanese life insurance is notoriously expensive compared to other international policies and there are a number of terms and conditions which make it inappropriate for foreign nationals.
Incidental Costs To Insure In Japan
Though the mortgage may be covered under Group Credit or Decreasing Term, most homebuyers also need to consider the second significant cost, incidentals; which consists of property taxes which are due January 1st every year, and costs of maintenance of the home required over the years, not forgetting inflation. The reason this is so important is that these expenses can be costly; for example, in Tokyo ward 23, the property tax rate is 1.4%, and city planning tax is 0.3% for a home that is 95 million JPY, over 1.6 million JPY a year. Though the mortgage is paid, your home will still have costs that must be accounted for so that your family can stay there comfortably, to neglect them may cause serious issues. Incidentals can be covered either under an expanded Decreasing Term, a standard Term, or Whole Life insurance policy, which is best will depend on your specific needs.
The home purchase process in Japan is relatively simple but often very little, if any, time is dedicated by the bank to discuss the available insurance options to ensure that you are able to protect your home, and your family. Covering your home’s mortgage with insurance can be simplified with a professional’s help to guarantee proper coverage as well as the getting the best price for your needs—ensuring that you and your family can enjoy your home worry free for many years to come.