Income protection and mortgage protection insurance are two different types of income replacement. Both can pay you if you need to take some time off work because of an injury or illness. However, mortgage protection can only be used to pay your mortgage repayments, while income protection can be used to cover other everyday living expenses as well.
The main difference between income protection and mortgage protection is this:
We've highlighted some other key differences below.
| Key Differences | Mortgage Protection Insurance | Income Protection Insurance |
|---|---|---|
| How does it pay out? | In one lump-sum or ongoing benefit payment | In monthly instalments, like an income. |
| When does it pay out? | If you pass away or become injured or ill | If you become sick or injured and can't work |
| How much does it pay out? | A specified amount to cover your mortgage repayments | Up to 75% of your income |
| What can it pay for? | Your mortgage repayments | Anything you want, including mortgage repayments |
| How long can you receive payments for? | It depends on the size of your loan and the agreement you make with the insurer | It depends on the 'benefit period' you choose. Options are generally 2, 3 or 5 years, or up until a certain age e.g. 65 |
| Are the premiums tax deductible? | No, premiums are generally not tax deductible for mortgage protection insurance. | Yes, premiums are generally tax deductible for income insurance. |
| What's the application process like? | Mortgage protection doesn't usually require any blood or medical tests when you apply. | Income protection requires you to disclose lifestyle factors such as age, smoking status and pre-existing conditions, which will affect the cost of your cover. |
Our tables can't show you prices because your premiums are based on the type of job you have, your age, health and a few other factors. However, to help give you an idea of how price varies, we've outlined some costs below based on a few different occupations who all selected a $3,000 monthly benefit.
| Cost | Age | Gender | Smoker | |
|---|---|---|---|---|
| Graphic designer | $45 a month | 30 | Female | |
| Mechanic | $84 a month | 40 | Male | |
| Carpenter | $222 a month | 50 | Female | |
| Accountant | $149 a month | 60 | Male |
*Quotes are based on the average of three quotes from three different insurers. Each person is on a $3,000 monthly benefit with the benefit period as close to 1 year as possible. The waiting period was selected as near to 30 days as the insurer would allow.
If you have income protection, it probably isn't worth getting mortgage protection insurance as well. Both cover you if you have to take time off work due to an injury or illness. However, mortgage protection will only cover your mortgage repayments. It can't cover all the other bills you need to pay — but income protection can.
For instance, say your mortgage repayments account for 28% of your monthly income — the limit that many lenders recommend — that still leaves a significant amount of monthly expenses left to pay for if you're out of work.
Income protection insurance can't provide you with 100% of your income, but at 75%, it can make sure you're still able to pay for the majority of your monthly expenses, including:
If you have both mortgage protection and income protection and submit a claim to your income insurer, it's likely they will reduce your monthly benefit based on your mortgage protection benefit. This is because income protection is capped at 75% of your income to prevent you from earning more while you're off than you would while you were working.
If you already have mortgage protection but want income protection to cover all your other monthly expenses, buy a policy that pays you a smaller percentage of your monthly income.
For example, if your mortgage accounts for 30% of your income, get an income protection policy that pays you 45% of your income, keeping you within the 75% limit. That way, you won't be wasting money.
These options differ between insurance providers, but some of the main additional options for life insurance cover include:
There are a few other important points worth keeping mind when it comes to mortgage protection policies:
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