What is mortgage protection? Find out how cover actually works.
Mortgage protection is a type of life insurance offered to those with a mortgage. Not to be confused with lenders mortgage insurance, Mortgage Protection covers the policy holder (as opposed to the lender). A typical policy ensures that mortgage repayments are covered in the event of something happening to you e.g. a major illness or a sudden death.
Key features of mortgage protection insurance:
- Covers mortgage repayments if you become disabled and unable to work
- Covers mortgage repayments if you lose your job, become redundant or otherwise face involuntary unemployment
- Pays out additional benefits if you die so that your family can repay the mortgage
Can I compare mortgage protection quotes here?
How much does mortgage protection insurance cost?
The exact cost of your mortgage protection insurance will depend on the following factors:
- Joint policy or single policy owners. Whether the policy is taken out as single or joint cover.
- Cover type. The policy chosen and the features that the applicant has included on the policy.
- Loan amount. The size of the loan will be used to calculate the life benefit premium.
- Age. Premium is calculated by taking into consideration the age of the policyholder at the policy commencement date.
- Repayment size. Your premium for disability type benefits is dependent on the size of your monthly repayments.
What are the key features of mortgage protection insurance
- Ability to keep on top of mortgage repayments. The benefit paid for mortgage protection provides great relief from any financial anxiety around being unable to pay your repayments if you are forced out of work due to disability.
- Cover if you're made redundant. Policyholders can take out protection to ensure their mortgage repayments will still be met even if they have been made redundant.
- Straightforward application process. Application for Mortgage Protection is generally quite simple with no medical examinations required.
- Joint policy. Many providers will offer discounts for joint policies that are taken out with ones spouse.
- Lump sum benefit paid to beneficiaries if policyholder passes away. Original sum insured for the protection will be paid as a lump sum to your beneficiaries. If the amount insured surpasses what is remaining the mortgage, this extra money will still be provided to your estate
Mortgage protection insurance vs lenders mortgage insurance
Don't get mortgage protection insurance confused with lenders mortgage insurance. Here are the key differences:
- Mortgage protection insurance is for you. It comes with life insurance policies and helps you or your family pay off the mortgage if you die, become disabled or lose your income.
- Lenders mortgage insurance is for the banks. It pays out when a customer defaults on their mortgage and the property has lost value.
|Mortgage protection||Lenders mortgage insurance (LMI)|
|Who is this cover for?||Specifically designed to offer protection for the individual taking out the loan as opposed to the lender||An insurance which protects the lender against any loss they might sustain if they have to sell your home to cover a defaulted home loan when you can't make repayments|
|Purpose||A form of insurance that you can take out to cover your mortgage in case you are unable to meet your repayments for any reason||Mortgage insurance is added to your mortgage if you pose a higher risk of defaulting, for example if you are paying a deposit of less than 20%. It is designed to protect the lender if you can't make your repayments.|
|Who pays for it?||This type of cover is take out by the borrower as extra cover||This is paid by the borrower. LMI is typically added to the total cost of your home loan.|
|Benefit type||Lump sum payment provided to the insured or their estate to assist them pay off their mortgage loan||A lump sum that covers the gap between what the property is sold for upon default and what you owe to your lender.|
|Events covered||Loss of job, temporary disablement, permanent disablement and death||Loss of job, temporary disablement, permanent disablement and death|
|Max sum insured||In most cases your insurer will allow you to take out cover up to $10 million||This will depend on the terms of you mortgage.|
Do I need mortgage protection insurance?
In some cases you can be entitled to government assistance if you become sick, injured or die and are unable to pay your mortgage. However, these benefits often have waiting periods and eligibility criteria which will exempt you from payments if your partner earns a certain amount, or if you have a certain amount of savings which could go towards your mortgage. Therefore, if you want to make sure your family can preserve their way of life, maintain an emergency savings fund and feel secure in making their home loan repayments, you will need to organise for mortgage cover. You can take out mortgage protection cover to suit your needs, and pay out a benefit for:
- Life. To be insured in case you die, your mortgage is paid out.
- Disability. If you are unable to work because of illness or injury your monthly repayments will be paid.
- Involuntary unemployment. If you lose your job your mortgage repayments will be covered for a certain amount of time.
- Trauma. If you are diagnosed with a serious condition such having a heart attack, stroke, cancer, or you need an organ transplant or coronary artery surgery. This benefit is paid in addition to your mortgage insurance benefit and can be as much as an extra $50,000.
It is a wise move to consider including Mortgage Protection in your financial plan to ensure any financial burden on your family is removed should something happen to you.
How do I compare mortgage protection insurance?
Mortgage protection is looking after the most important thing in your life – your family’s security, so you want to make sure you know how to find the most reputable insurer, the most inclusive policy and the best benefits for your needs. Following are the things you should keep in mind as you compare mortgage cover policies:
- Coverage. Look at what the benefit payout amount is designed to cover and make sure it can pay all of the expenses related to your mortgage including your interest and repayments. It is also time to consider how much coverage you should take out to be truly protected.
- Waiting period. If something happens to the main income earner of the family there will be enough emotional turmoil in the house without adding financial problems, so make sure that your benefit will payout as soon as possible so your family aren’t put under financial stress.
- Your dependents. Consider whether you have children, or even ageing parents, who depend on you, and how long they are likely to be dependent for and this will help you decide on the level and the term of cover.
- Other income. You may be able to look at lower levels of cover if your family has other sources of income, such as investments, or assets which could be sold. At the same time you don’t want your family to sell assets to pay the mortgage and then be left without any other assets – and where does the money come from when there’s nothing left to sell?
- Your risk factors. The costs of mortgage protection can vary depending on your health and lifestyle factors, so you may need to seek out a specialised insurer who has experience in catering to your needs.
- The provider. As well as insurers who specialise in certain health and lifestyle factors, when comparing insurers make sure you choose a company who is established and well respected, and one who is friendly and easy to deal with.
- Self insurer. You may be considering saving up to create a financial cushion in case you lose your job or are unable to work, as there are no conditions, no eligibility, no waiting periods and you can invest the money in the way you choose. This may be an option if your employer offers a generous sickness benefit policy, or if you have a partner who earns a good salary and would be able to cover the cost of the mortgage, but this is something to discuss with your financial planner.
Remember that as with most forms of insurance, the costs of the premiums are determined by a combination of your cover amount, and your risk factors. The waiting period you opt for and the benefit period you choose will also influence how much you pay for your mortgage protection insurance. Some insurers will also have extras you can add to your policy to help you cover the cost of your other household and lifestyle bills in case you are unable to work.
What are the benefits and drawbacks of mortgage protection insurance?
- You can protect one of your biggest investments. A mortgage ties together your financial security, your investment and your house.
- It can protect your mortgage from any loss of income, whether due to death, disability, redundancy, illness or other involuntary unemployment.
- It has flexible options. You are able to choose a policy that covers you against fewer or more risks as desired. Options include big lump sums to be paid if you die so that your family can repay the entire mortgage, policies that will cover mortgage repayment costs for a set period of time, and more.
- It can be budgeted for alongside the mortgage itself. You can budget for mortgage protection insurance by calculating its costs alongside the mortgage itself. Consider how your insurance premiums will extend your repayment period and affect the total cost of your mortgage to get a clearer idea of its value for money.
- Only one payout. In the event that both names on the policy were to pass away, any surviving dependents would only receive the one benefit
- Premiums may vary depending on your job security and the wider economy. This means it tends to get more expensive as it gets more important.
- If the housing market collapses or your property loses value, you might end up with an overpriced and over-comprehensive mortgage protection policy.
- Relationship breakdowns. Issues can arise in the event that a relationship breaks down and the policy needs to be split
Mortgage Protection: Frequently Asked Questions
Question: What is mortgage protection insurance?
- Mortgage protection will pay your repayments each month in the event that you are unable to bring in your regular income because of illness, injury or redundancy.
Question: Why do you need cover?
- Your mortgage is likely to be the biggest expense in your monthly budget, and would be hard to maintain if you weren’t working. The result would be tremendous upheaval for your family if you were forced to sell your home.
Question: What is an excess period?
- This is the amount of time you have to wait before receiving your first payment from your mortgage protection. You can generally choose the excess period which suits you, just remember the shorter your waiting period, the higher your premiums will be.
Question: Do I have to have mortgage protection insurance?
- Mortgage protection insurance is not compulsory. By comparison, lenders mortgage insurance will often be required by the mortgage lender in order for the loan to be approved to the borrower.
Question: Is Mortgage protection insurance the same as PPI?
- Mortgage protection insurance does work in a similar way to PPI in that it will ensure and outstanding loan is re paid in the event that the policyholder passes away. Mortgage protection insurance is generally offered as a standalone policy by life insurance providers and is designed specifically for repayment of the policyholders mortgage in the event of their death.
Question: What does mortgage protection include?
- This type of insurance includes protection in case of an accident or illness which stops you from earning enough money to cover your home loan repayments. Some policies will also include an added 25% benefit amount to cover additional costs such as utility bills, council rates, car loans and credit cards.
Question: How long does a mortgage protection benefit last?
- Most policies will have a benefit period of 12 months, although this depends on the choices you made in your application, and your insurer.
Question: Who is eligible for mortgage protection?
- Anyone aged between 18 and 65 can usually apply for protection on the mortgage for their main residence, and as long as they are in full time, continuous employment.
Question: Can it benefit the self employed?
- In most cases you can take out insurance against the possibility that you are unable to work and generate an income in your business, but you will need to be able to prove that the business has ceased to trade as a direct result of your inability to work.
Question: Can it benefit contract workers?
- As a contract worker you may need to provide different proofs of employment for your mortgage protection insurance, such as an annual contract which has been renewed at least once, a contract with the same employer for an unbroken period, or be able to show that you originally worked on a permanent basis but have transferred to a fixed term contract without a break in employment.
Question: How is mortgage protection insurance paid?
- You can choose to pay your premiums via direct debit each month, and will have to check with your insurer to see whether there are additional costs if you want to pay by cheque or credit card.
Question: What is excluded from mortgage protection?
- The exclusions of mortgage protection will differ with each insurer, and so you will need to check the product disclosure statement for clauses such as the qualifying period you are unable to work, the eligible illnesses, injuries and disabilities, and any other costs which are covered.
Question: Mortgage protection with a pre existing condition?
- This will depend on the insurer, who may approve you for a policy which excludes you for coverage for the particular condition, or they may simply charge you higher premiums as you are a greater risk, but provide you with full coverage.
Question: What sorts of illnesses and injuries are covered?
- Again, this will differ between insurers, but you should be looking for a comprehensive policy which covers you for back injuries, mental or nervous disorders and partial and permanent disability.
Question: How is a successful claim paid?
- Once a claim is approved, the benefit amount will be paid directly into the bank account you have nominated in your application, or the account from which your premiums have been debited.
Question: What information is needed to make a claim?
- If you are sick or injured and unable to work, you will usually have to have a doctor sign off that you are unfit for work, and have the doctor provide regular evidence.
Question: When does a mortgage protection policy come into effect?
- Once you have completed an application and been approved by the insurance underwriter, your first premium will be debited from your account to signal the commencement of your cover.
Question: Can mortgage protection be cancelled?
- Most insurers will include a cooling off period in their policy contracts, so if after 30 days you change your mind about the policy you can cancel your cover and you may be refunded any money paid. After any cooling off period you will usually only receive back any premiums paid in advance.
Question: Can the insurer change the cover?
- Your insurer may make adjustments to your policy as their products change or are replaced with newer policies. The premiums may also be changed by the insurer, and you should be notified in writing.
Question: Is mortgage protection insurance tax deductible?
- Generally, the premiums payable for mortgage protection are not tax-deductible as the payment is not paid in gaining assessable income. Benefit payments are not assessable for income tax purposes.