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Mortgage Protection Insurance provides a lump sum benefit if you die or are unable to work due to illness or injury and can no longer make mortgage repayments. This type of cover can also provide protection for a specified period for involuntary redundancy.
Life insurance is another insurance that is similar to mortgage protection in that it provides a lump sum payment to cover outstanding debts (including a mortgage). It can cover the ongoing living expenses of your financial dependents if you pass away or become injured.
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.
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 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.
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.
There are several reasons why someone might default on their mortgage repayments:
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.
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:
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.
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. |
Many people consider life insurance to be expensive. Mortgage protection insurance is a bundled solution for the budget conscious and/or those unwilling to seek personal advice from a financial planner and undertake any required medicals and blood tests.
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;
The underwriting process for mortgage life insurance is much more straightforward and premiums will be based on;
If the mortgage loan is held with the same provider that is giving the mortgage protection insurance it can be;
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.
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.
Mortgage life insurance policies generally end upon one of the following events occurring;
Alternatives to this type of cover include;
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;
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