How life insurance can protect your mortgage

Matthew Lang

Matthew Lang

Updated 02/11/2022

Mortgage protection insurance: What would happen if you couldn’t earn an income to make mortgage repayments? Find out how life insurance can help protect your biggest asset.

How life insurance can protect your mortgage

How can life insurance can protect your mortgage?

As a homeowner, life insurance can give you peace of mind that you’ll be able to make your mortgage repayments even if you can’t earn an income. Here’s how it works:

Key Points

  • If you’re a homeowner or considering buying a house, it’s a good idea to have a plan for what you’ll do if something unexpected happens and you can’t earn an income.

  • Income protection is a type of life insurance that keeps the cash flowing if you’re unable to work due to illness or injury, so you can continue paying off your mortgage.

  • Income protection cover can cost as little as a few dollars a day.

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If you’re a homeowner, your property is probably your biggest and most valuable asset. 

So it’s understandable that you might wonder what would happen if you couldn’t make your mortgage repayments. 

For example, what would you do if you fell ill or were injured in a way that meant you couldn’t earn money for weeks, months or even years?

It’s questions like this that can keep us up at night.

Luckily there are insurance options available to cover you for scenarios just like this.

Here’s how it works:

What is life insurance?

Before we get into the specifics of mortgage life insurance, let’s cover the basics. Life insurance is essentially an umbrella term for cover designed to provide financial protection, if something unexpected happens in your life. There are four main types of life insurance in Australia:

  • Term life insurance,also known as life cover,pays a nominated beneficiary (such as your partner) a lump sum if you pass away or are diagnosed with a terminal illness.

  • Trauma insurance pays a lump sum of money in the event of a specific illness or injury, like cancer or a heart attack. The specific illnesses or injuries are defined by the insurer, in the policy documents.

  • Total and permanent disability (TPD) insurancepays a lump sum if you can't work ever again due to permanent illness, injury or disability.

  • Income protection insurance pays around 70% of your usual income, usually monthly, if you can't work temporarily due to an injury or illness.

Each type of life insurance can safeguard you and your loved ones in different ways. That said, income protection insurance is the type of cover that generally pays a monthly amount rather than a lump sum. It can help keep the cash flowing while you can’t work, so you can stay on top of things like your home loan repayments. 

Why is life insurance important when buying a house for the first time?

A lot of people don’t give much thought to life insurance until they get married, have kids, or buy a house.

It makes sense: until somebody is relying on you to earn an income or you have long-term bills to budget for, life insurance might not be at the top of your priority list.

But if you’re buying a house for the first time, it’s a good idea to have a plan for what you’ll do if something unexpected happens and you can’t earn an income for an extended period of time.

Worrying about keeping a roof over your family’s head is the last thing you need when you’re hurt, or unwell. This is where life insurance comes into play. With the right policy you can be assured that if your income dries up, you’ll be able to make your mortgage repayments and protect your home.

Can income protection cover my mortgage repayments?

Yes it can.

One of the big reasons people get income protection is so they know they’ll still be able to cover essential bills like home loan repayments, should they be unable to work.

Income protection cover replaces a percentage of lost income when you can’t work due to an illness or injury. This means your cover can help you continue paying off your mortgage and maintain your standard of living, while you’re recovering. You can read more about income protection insurance here.

What factors should I consider when getting income protection insurance?

Some of the important factors to look at when considering income protection cover include:

  • Coverage – including which illnesses and injuries are covered by the policy.

  • Benefit period – this is the maximum length of time for which you can be paid, and typically ranges from 1, 2 or 5 years, or up to the age of 65.

  • Waiting period – this is the period of time you must wait from becoming unable to work (due to illness or injury), to the time you’re eligible to begin receiving income protection benefit payments.

  • Value for money – the ideal policy strikes a fair balance between comprehensive cover and affordability, depending on what you need.

One of the quickest and easiest ways to find a policy that offers the best value for money for your situation is to compare options side-by-side. 

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What can influence my income protection premium?

Income protection premiums can be affected by factors such as:

  • Your age – generally the older you are, the more you’ll pay

  • Your medical history – health conditions and your smoker status can bump up your premium

  • Your occupation – people in high-risk jobs pay more

  • The waiting period – a longer waiting period can reduce your premiums

  • Benefit period – a shorter benefit period can cut down on your premiums

Will my premium decrease as I pay off my mortgage?

Generally no, your premium won’t be affected by your mortgage balance.

However, if you’re thinking about getting income protection as a safeguard for your mortgage repayments, it’s worth shopping around to look for the options that suit you best.

From as little as a few dollars a day, you can rest easy that if you ever find yourself unable to work due to illness or injury, you’ll still be able to make your home loan repayments.

Our handy comparison tool lets you compare income protection cover side-by-side.

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This guide is opinion only and should not be taken as medical or financial advice. Check with a financial professional before making any decisions.

Matthew Lang is the general manager of life insurance at Compare Club. Matthew leads a team of dedicated professionals who are passionate about helping individuals and families make informed decisions about their life insurance needs. Whether it's finding the right coverage for your specific circumstances, comparing policies, or optimizing your existing policy, Matthew and his team are here to provide expert guidance and support.

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Matthew Lang

General Manager of Life Insurance