Should I Get Mortgage Protection Insurance?
As a homeowner, making sure you can keep a roof over your own - and your family’s head - in uncertain times, offers peace of mind. This starts with ensuring you can cover your home loan repayments, even if you can’t work.
Income protection payouts can be used to cover essential bills like your mortgage repayments, medical bills and funeral costs, if necessary.
Mortgage protection cover is usually offered by your lender and it covers your home loan, not you.
Both mortgage protection and income protection benefits can be paid either in a lump sum, or via ongoing payments.
Mortgage protection benefit payments can only be used to cover your home loan repayments.
Lender’s Mortgage Insurance (LMI) is not the same as income protection cover or mortgage protection cover: LMI protects the bank - not you.
There are a couple of ways to make sure your mortgage expenses are covered if you can’t work:
Mortgage protection insurance*: this type of cover makes sure your home loan repayments are kept up if you’re unable to work due to injury, illness, and involuntary redundancy.
Income protection insurance: this cover pays out around 70-90% of your income when you’re unable to work due to injury or illness.
The main difference between the two types of insurance is that you’re able to use your income protection benefits to cover any expenses you need. Mortgage protection cover is specifically for keeping up your home loan repayments. Any benefits from this cover are usually paid directly into your loan as part of your loan repayments, not to you.
It’s worth noting that income protection cover doesn’t include redundancy insurance, though some insurers may offer this as an optional add-on. Since Covid however, redundancy insurance has been harder to obtain, even as an extra on your life insurance.
What is income protection insurance?
Income protection cover is one of the four kinds of life insurance available in Australia. It’s designed to protect you and your family if anything happens to interrupt your income.
As you can imagine, not being able to work at your usual job and earn your usual salary can impact your life in the scariest ways, because your home loan repayments still need to be paid, along with:
Transport costs (such as fuel or toll fees)
Rates and taxes on your home
…and so on.
In addition, depending on the reason for your income interruption (i.e., illness or injury), you may have additional costs to cover such as medical specialist consultations, hospital stays or rehabilitation clinics.COMPARE & SAVE
How does income protection cover help my family?
Income protection cover pays out around 70% of your regular salary, often in a monthly payment. These funds can be used to keep your household running while you recover. The idea is that you’ll be able to maintain your home and take care of your family’s most pressing needs.
If you don’t recover, any income protection payout can also be used to cover funeral costs, though your policy may have a life cover component as well.
Why is income protection important when I become a home owner?
Many people don’t really think about their income until they take on a huge commitment of some kind - like a partner, kids, a house - or, often, all three of these.
Owning a home is a huge financial commitment, and your income is a big part of keeping your new roof over your head. While no one expects to be injured so badly they can’t work, or to get debilitatingly ill, it can happen, so it’s smart to have a plan that covers yourself and your family if you can’t earn your income for an extended period of time.
No one needs to be stressing over home loan repayments and power bills when they’re trying to recover and keep their family safe.
With the right income protection, you’ll be able to make your mortgage repayments and protect your home and family no matter what comes at you.
Do I need a medical exam to get income protection cover?
Not usually, although your premium can be influenced by factors such as:
Your age – usually the older you are, the higher your premium will be.
Your medical history – existing health conditions and smoker status.
Your occupation – people in high-risk jobs will pay higher premiums.
Your waiting period – a longer waiting period can reduce your premiums.
Your benefit period – opting for a shorter benefit period can reduce your premiums.
Important factors to look out for when getting income protection insurance:
Cover Limits – check which illnesses are covered, and how pre-existing conditions are treated.
Benefit period – this is the maximum length of time for which you can be paid your benefits, and can vary from 1, 2 or 5 years, or up to the age of 65.
Waiting period – this is the period of time you need to wait between becoming unable to work, and the time you can begin receiving some benefit payments.
An ideal income protection policy balances your comprehensive coverage with an affordable premium, and meets your needs in terms of the benefit payout. For example, there’s little point in a monthly benefit amount that won’t cover your home loan repayments.
Will my income protection premium decrease as I pay off my mortgage?
Your income protection premium isn’t usually affected by the size of your mortgage. That said, you can certainly adjust your benefit amount if your home loan repayments reduce - and this can result in lower income protection insurance premiums.
What is mortgage protection insurance?
Mortgage protection insurance is a type of cover that pays out if you’re unable to meet your home loan repayments. The insurance benefit is exclusively for the use of covering your mortgage, and you’re not able to pay the funds anywhere else. It’s usually a policy offered by your lender, and is sometimes paid out directly to your loan, rather than to you*.
This is because mortgage protection cover is designed to protect your mortgage, and nothing else. In effect, it covers the debt on your home, not you or your family.
How is this different to Lender’s Mortgage Insurance (LMI)?
Lender’s Mortgage Insurance (LMI) is an insurance policy banks take out on loans over a certain debt to value ratio. It insures the bank against the borrower defaulting on their loan - and it doesn’t cover you, or your home loan at all. It only protects the bank.
LMI isn’t something you have any control over - it’s either required when you take out your home loan, or it isn’t. As the insured is your bank and not you, you don’t have any say in who the insurer is. It’s something many borrowers pay for, but it’s a lot like other home loan set up costs.
The bottom line: Income protection vs mortgage protection
Deciding which type of insurance protects your home and your family better is an individual choice, and depends very much on your specific needs and circumstances. Mortgage protection insurance only covers your home loan repayments - nothing else - so your, and your family’s, living expenses will still need to be funded.
If you and your family have other costs you need to cover while you’re recovering from illness or injury, then income protection cover might better suit your needs. We can help you compare policies and insurers for this complex product.COMPARE & SAVE