What is a mortgage protection insurance plan?
Often bundled with life insurance, mortgage protection insurance is defined by:
- Paying out additional benefits if you die so that your family can repay the mortgage
- Covering mortgage repayments if you become disabled and unable to work
- Covering your mortgage repayments if you lose your job, become redundant or otherwise face involuntary unemployment
Mortgage protection insurance protects your home investment from circumstances beyond your control, meaning you can keep your long term financial plans on track even if you suffer short term setbacks.
How is mortgage protection insurance different to lenders mortgage insurance?
Mortgage protection insurance and lenders mortgage insurance are two very different things.
- 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.
When a bank gives someone money for a mortgage they’re taking two risks. The first is that you will lose your income or die and be unable to pay back the money. They protect themselves against this by claiming the house as collateral if you can’t make repayments.
The second risk is that the property loses value after the mortgage is taken out. Here, even if the bank claims the house, they might still lose money. Lenders mortgage insurance protects the banks from this loss.
The benefits and drawbacks of mortgage protection insurance
- It can protect your mortgage from any loss of income, whether due to death, disability, redundancy, illness or other involuntary unemployment.
- You can protect one of your biggest investments. A mortgage ties together your financial security, your investment and your house.
- 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.
- It costs more.
- If the housing market collapses or your property loses value, you might end up with an overpriced and over-comprehensive mortgage protection policy.
- The limits may be too low to provide good value for money.
- 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.
- Certain insurer eligibility requirements might rule you out of getting a policy.
How to decide whether a mortgage protection insurance policy is worth it
Not all insurance policies are made equal, and different situations call for different policies. With mortgage protection insurance, you should consider:
- The limits. These are the maximum sums payable, and they should fit the value of your mortgage. For example, a policy might have a maximum limit of $1 million for lump sum payments if you die. This might not be enough if your mortgage is valued at $1.5 million, but might be too much and overly expensive if it’s valued at $500,000.
- Exclusions. These are circumstances under which the insurance policy will not pay benefits. Because this type of policy is tied to your health and wellbeing, common exclusions are self-inflicted harm and suicide, certain risky pastimes, pre-existing health conditions and the types of conditions you will often find restricted in life insurance policies. Similarly, when you have mortgage protection insurance for loss of income, cover is often limited to people who work full time and are not self-employed. Income protection components of the policy are often subject to restrictions around
- Waiting periods. These indicate how long you must have held your policy for before being able to make a claim, as well as how long you need to be injured, sick, unemployed or unable to work for before being able to make a claim. For example, some policies will require you to be out of work for 30 days or more in order for you to claim loss of income benefits for illness. These waiting periods usually indicate that mortgage protection insurance benefits are only for extended periods without work, or more severe illnesses.
Who might consider mortgage protection insurance?
Some people will be able to benefit from mortgage protection insurance more than others. Do any of these sound like you?
- Those with families, particularly young children. If something happens to you and your mortgage goes unpaid, your family might lose the house. Mortgage protection insurance helps you to avoid this.
- Single income households. If your partner is dependent on your income, then mortgage protection insurance can help you both keep a roof over your heads if your income disappears.
- People whose home is an investment property. Mortgage protection insurance offers key protection for your biggest investment, and can keep you from losing it all if something goes wrong.