How can I pay for my mortgage if I suddenly pass away, become sick or injured?
There are generally two types of insurance products that offer protection in these circumstances.
- Life Cover: Provides a lump sum payment to cover outstanding debts (including a mortgage) and to cover ongoing living expenses of your financial dependents if you pass away or become injured.
- Mortgage Protection Insurance: Will provide a lump sum death benefit to the policy owners beneficiaries but will also be taken out to provide a replacement income if they are unable to work due to disability. This type of cover also provides cover for a specified period for involuntary redundancy.
Do these two options sound the same? That's because they have a similar purpose with some key differences.
Why is life insurance important when buying a house for the first time?
For many people, buying their first home is the biggest investment they will make in their lives. A mortgage is a large ongoing debt that will take many years to pay off, so insurance is obviously an important form of protection to ensure your loved ones continue to have a roof over their heads if something were to happen to you.
'But I already paid for insurance inside my home loan?'
While many first home buyers must take out lender’s mortgage insurance as a condition of their loan, this only protects the lender against them defaulting on the loan, but will not prevent them from losing their house.
Mortgage protection insurance
Mortgage protection insurance is also available, but this generally only covers you for a short period of time and only covers your mortgage repayments, not the multiple other bills that would still need to be paid if you were unable to work for any reason.
Life insurance can offer greater protection
So life insurance with a total and permanent disability (TPD) component is a necessary form of cover to have against the possibility that you might die or become incapacitated and unable to work and therefore unable to meet your mortgage repayments.
What factors (aside from death) could prevent me from paying my mortgage?
There are several reasons why someone might default on their mortgage repayments:
- They could be made redundant from their job through no fault of their own
- Their partner could lose their job in a two-income family
- A family member could become ill and require full-time home care
- The main breadwinner could die from accident or illness or become permanently incapacitated
Is included life insurance (from super) enough?
Due to our inherently optimistic outlook on life, many Australians are underinsured. We rely on the default life insurance and TPD insurance held in our superannuation, thinking it will be enough if the worst were to happen.
Unfortunately, research has shown that this is far from the truth, with the average Australian only having enough life insurance inside super to cover 14% of their needs. Not only that, but because this insurance is held inside super, it can be subject to long, drawn-out approval processes before the trustees will release any funds. Not very useful in a time of crisis when financial help is needed right away.
When do people typically consider life insurance?
Studies have shown that the purchase of life insurance is linked to several high-impact events in our lives. In order of importance, these include:
- Having children (43%)
- Buying a home (35%)
- Change in financial situation (33%)
- Marriage (28%)
It is when we reach milestones such as these that we begin to think more seriously about protecting our assets and our loved ones and buying a home is right up there in terms of its impact on our purchasing behaviour.
Mortgage Life Insurance Vs Life Insurance
The table below will outline how these two types of products differ to help you make a better assessment of an appropriate option for you:
|Feature||Mortgage Protection||Life Insurance|
|Sum-Insured||Most mortgage protection plans will only provide a benefit payment for amount that is outstanding on the mortgage. Others will provide the insured sum that the policy owner applies for. This amount is usually to a maximum of $750,000. The difference between what is paid and what is outstanding on the mortgage is paid to the policy owners estate to cover other debts/expenses.||Provides an increased benefit to cover all debts. This is usually unlimited or to a maximum of $1,500,000.|
|Disability Benefit||Most mortgage protection policies will offer an additional benefit to cover repayments if the policy owner is forced to take time out work due to disability. Most providers will pay a benefit that will cover around 120% of repayments for a maximum period of around 30 months.||Disability Benefit is usually offered as an additional benefit on Life Cover policies. Benefit is provided in a lump-sum benefit usually to a maximum of $5,000,000 (subject to change between insurers and the policy owner’s circumstances.|
|Life Only and Disability Only||Most insurers will allow mortgage protection to be taken out as either life cover only, disability only or as life and disability cover.||Applicants have the option to purchase both disability cover and life cover as standalone policies or bundle the cover together. Standalone disability policies will generally offer more comprehensive cover than if bundled. Standalone policies will result in higher premium payments overall.|
|Involuntary Unemployment Cover||Most mortgage protection policies will provide cover for involuntary unemployment. This benefit will cover mortgage repayments for a specified period (usually 90 days) while the insured is unemployed.||Unemployment cover is not provided on life insurance policies if provided from life insurance companies. Some general insurance providers will offer redundancy cover on income protection plans. Life insurance policies may offer a premium waiver during redundancy.|
|Duration of Cover||Most mortgage protection policies will provide cover for a period of 5 years with guaranteed renewal of cover to age 59.||Term life cover is generally taken out on a 10, 15, 20 and 30-year basis though cover is guaranteed renewable and can remain in place until the policy owner's death. The maximum entry age on life insurance is usually 75 age next birthday.|
|Medical Underwriting||Applicants for mortgage protection are generally not required to undertake and medical check-ups or submit any lengthy questionnaires to get cover. The application process is fast and easy.||Applicants may be required to undertake medical testing to be approved for cover based on whether they smoke or any pre-existing medical conditions. The application process can be quite drawn out.|
|Financial Planning/Funeral Benefit||There is no benefit provided to cover funeral or financial planning in the event of death.||Most life insurance policies will provide an advancement of the death benefit (usually around $15,000) to cover the immediate costs that may follow the policy owner's death such as funeral costs or the cost of hiring a financial planner.|
|Premium Payments||Premiums will remain the same over the life over the policy and are based on the cover type, loan repayment amount and age of policy owner.||Premiums can be paid on a stepped or level basis and are determined by a range of factors including sum insured, policy benefits, smoking status, health and age.|
|Taxation of Benefits||Generally premiums payable for Mortgage Protection are not tax-deductible benefits paid are not assessable for income tax purposes.||Premiums or benefit payments for cover funded outside of super are not tax deductible. Premiums may be tax deductible inside superannuation and benefit payments can attract tax liability if paid to non-dependents.|
|Terminal Illness||Mortgage protection insurance will generally not provide an advancement of the benefit if the policy owner is diagnosed with a terminal illness.||Most life insurance policies will provide an advancement of the sum-insured if the policyholder is diagnosed with a terminal illness and is not expected to live for a period longer than 12 months. An approved medical practitioner must verify this.|
|Price||The reduced benefits of mortgage protection make it a more affordable option.||Life cover is generally more expensive but there is greater flexibility in how premiums are paid.|
In comparison to life insurance where price is based on a whole range of different factors, the cost of mortgage protection really comes down to the policy and mortgage owed. The premium of life insurance is not only based on the policy chosen but also the level of risk the applicant presents to the insurer. This will include;
- Smoking and drinking habits
- Pre-existing health conditions
- Hobbies and pastimes
- Sports the applicant plays
The underwriting process for mortgage life insurance is much more straightforward and premiums will be based on;
- Single or joint cover: Whether the policy is taken out as a standalone policy or if it has been combined to include cover for the applicants spouse.
- Cover type: Whether the policy is taken out as;
- Life cover only
- Disability cover only
- Life and Disability cover
- Mortgage amount: Outstanding debt owed on the applicants mortgage.
- Age: Premium is also based on the age of the each applicant at the date of application.
- State: State that the policy owner lives in can have a minor role in the premium payable due to stamp duty.
How will I pay my premium?
If the mortgage loan is held with the same provider that is giving the mortgage protection insurance it can be;
- Included in the loan amount, which is, then subject to the interest rate charges.
- Paid month to month by direct debit or credit card by the policy owner to the financial institution.
Will my premium decrease as I pay off my mortgage?
One of the major drawbacks of mortgage protection insurance is that the premiums you pay will not decrease inline with the decrease in the amount owing on your mortgage as it is paid off. Your premiums will remain the same if you only have $250,000 owing as they were at the start of the policy where $750,000 was owing. This is one of the major advantages of life insurance where the sum-insured can be reduced as the financial obligations change i.e. financially dependent children move out of home, income increases, personal debt is paid off and mortgage is paid off.
Will my sum-insured decrease the amount owing on my mortgage?
It is essential that applicants are aware of their provider’s conditions around the actual benefit payment. Some insurers will only pay the amount that is remaining on the policy owners mortgage while others will pay the full sum-insured. This means that the difference between the amount owing on the mortgage and the sum-insured will be provided to the policy owner or their beneficiaries to use as they see fit.
When do mortgage protection policies end?
Mortgage life insurance policies generally end upon one of the following events occurring;
- The policy owners mortgage is paid off or foreclosed
- The loan is cancelled
- The mortgage protection policy is cancelled
- The insured reaches the maximum age specified under the policy (usually 65)
- The life benefit is paid or the disability benefit is paid
What are some alternatives to mortgage life insurance?
Alternatives to this type of cover include;
- Will provide cover for other outstanding debts and future expenses
- Can have stepped premium structure (increases over time), level (remain constant over the life of the policy) or hybrid (start off stepped before transitioning to level at a later stage of the policy
- Policy can be structured to include cover for Trauma and TPD
- Can include advance payment of the sum-insured to cover final expenses (funeral/financial planning)
- Range of other built-in benefits such as complimentary family cover and premium waiver
Income Protection Insurance
- Ongoing benefit paid (usually monthly) if the insured is disabled due to injury or illness and is unable to work. Will usually provide payment of 75% of their regular income though some providers will provide additional cover if it is directed to the policy owners super.
- Broad range of definitions of disability to choose from with benefit also paid for partial disablement.
- Additional benefits to cover ongoing costs of rehabilitation and nursing care as the insured recovers.
- Premiums for cover held outside of superannuation are generally tax deductible. Cover inside super is generally taxed.
- Lump sum benefit for death paid if the insured is pass away. This is usually a multiple of the monthly benefit payment.
How do I compare mortgage life insurance quotes?
If you are interested in taking out mortgage life insurance, its worth taking the necessary steps to ensure you are getting the best policy for your money. Here are some key steps to take to compare different options;
- Premiums: Obviously the price of the premiums is major consideration when reviewing policy options. The simplicity of mortgage protection can make it easier to assess how these compare based on the benefits and features provided.
- Maximum entry age: It is worth looking at the maximum entry/exit age that applies for the policy.
- Disability definition: If you are opting for a policy that features a benefit payment for disability, it is important to determine what events a benefit will be provided for.
- Interim accidental death benefit: Most policies will offer interim accidental death benefit, which will provide benefit payment to provide cover from the date the policy, is applied for till the date that cover commences.
- Involuntary redundancy conditions: It is worth reviewing the conditions applied to the involuntary redundancy payment. Typical exclusions include;
- Workers contract ends
- Voluntary resignation
- Involuntary redundancy for employment outside of Australia
- Cooling off period: Most policies will offer cooling-off periods of between 20-30 days.
- Claim policy: The process of claiming the benefit can vary between providers so it is worth assessing what will be needed in the event of a claim. This should be displayed on the providers website.
- Policy discounts: Some providers will offer a premium discount for joint policies. This is generally between 5-10%.
- Benefit payment: It is crucial to assess how the benefit will be paid in the event of the claim. Some providers will give the total amount of the sum-insured while others will just provide the amount that is owing on the mortgage.