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Mortgage protection insurance

Do you need mortgage protection insurance?

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Mortgage protection insurance can pay your mortgage if something goes wrong, but so can income protection and death cover. So is it worth it? It depends on your personal preference and financial situation.

What is mortgage protection insurance?

Mortgage protection insurance is a type of life insurance that is designed to protect one very specific but important asset: your home. Sometimes referred to as home loan protection insurance, mortgage protection insurance can cover you, the borrower, in case you can’t pay your loan. It can pay the cost of regular monthly mortgage repayments if you die, become seriously ill or lose your job.

Not to be confused with lenders mortgage insurance (a type of insurance that lenders can take out if they think a borrower is a high risk), mortgage protection insurance covers the borrower, not the lender. With mortgage protection insurance, the borrower owns the policy and usually pays a monthly or annual premium in return for financial protection should an insured event prevent them from paying their loan.

Mortgage protection insurance providers

Here are some of the mortgage protection insurance providers we found that are available in New Zealand:

What does mortgage protection cover?

Mortgage protection insurance can cover mortgage repayments for the following:

  • Disability. If you suffer temporary disablement, permanent disablement and cannot work.
  • Loss of job. If you are made redundant but not if you simply quit your job.
  • Death. If you pass away, mortgage protection may continue to pay your mortgage repayments, so that your family doesn’t have to.

Bear in mind that most policies exclude any pre-existing condition prior to purchasing mortgage insurance protection. So if you receive a medical consultation for any ailment or condition in the 12 months before you purchase the policy, and that medical condition leads to a claim after the policy commences, you aren’t covered.

Also, you are not typically covered for disability or loss of job if you work part-time, casual, contract, or in a temporary capacity for less than 20 hours per week. This is generally also the case if you are self-employed and work less than 20 hours per week.

What are the pros of mortgage insurance?

Unsure about mortgage insurance? There are benefits to taking out cover.

  • You can protect one of your biggest investments. A mortgage ties together your financial security, your investment and your house.
  • It can protect your mortgage from any loss of income. Whether due to disability, redundancy, illness or other involuntary unemployment and you are unable to pay your mortgage, your payments are covered.
  • It has flexible options. You can choose a policy that covers you against fewer or more risks as desired. Options may include big lump sums to be paid if you die so that your family can repay the entire mortgage, policies that 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.

What are the cons of mortgage insurance?

Before committing to any type of insurance policy, it’s worth considering the drawbacks.

  • It only covers your mortgage. Your home is definitely worth protecting, but there are other insurance options out there that will protect your home and everything else. Income protection insurance, for example, can cover mortgage repayments, school fees, day-to-day living expenses and other loan repayments like a car loan.
  • Only one payout. In the event that both parties named on the policy were to pass away, any surviving dependents would only receive the one benefit.
  • Premiums may vary depending on your job security and the wider economy, which means it tends to get more expensive as it gets more important.
  • If the housing market collapses or your property loses value. If this happens, you might end up with an overpriced and over-comprehensive mortgage protection policy.
  • Relationship breakdowns. Issues can arise in the event that a relationship breaks down and the policy needs to be split.

Is mortgage protection insurance worth it?

Mortgage protection insurance only covers your mortgage. As you know, your mortgage is simply a part of your day-to-day expenses, albeit a significant portion, which means if you are forced to stop work and made a successful claim, you still have other bills to pay, such as:

  • School costs. If you have children, you need to continue paying their school costs.
  • Other loans. Whether it’s a car loan or a student loan, many of us are paying off more than just our home loan at some point in our lives.
  • Living expenses. With mortgage protection insurance, you still need to find money to pay for essentials like food, energy bills and transport costs.

If you already have these expenses covered, then mortgage protection insurance might be worth it. However, if you don’t want to eat into your savings, income protection insurance is probably the more financially viable option.

What insurance can I take out instead of mortgage protection insurance?

Mortgage protection insurance is a type of life insurance. However, it’s not necessarily the most comprehensive life insurance option. Here are some others worth considering, all of which can help with mortgage repayments.

  • Income protection. Income protection is designed to replace your income by up to 85% should you become sick or injured. To be covered, you need to pay a monthly fee, which can give you peace of mind knowing you’re covered for all your expenses, not just the mortgage if something stops you from working. If you die, some policies pay your entire benefit in one lump sum, helping your loved ones pay off the mortgage.
  • Life insurance. Death cover, more commonly just referred to as life insurance, pays out a lump sum of money when you die. This money goes to the people you nominate on your policy, so could easily help pay off your mortgage.
  • Total and permanent disability (TPD). TPD is often included with death cover and provides you with a lump sum for permanent loss of work due to serious illness or injury. This lump-sum payment can go towards mortgage repayments plus other day-to-day expenses.

What to look for when doing a mortgage protection insurance comparison

Mortgage protection is looking after the most important thing in your life – your family’s security, so here’s how to find a reputable insurer, the most inclusive policy and the best benefits for your needs.

  • Coverage. Look at what the benefit payout amount is designed to cover and make sure it can pay all of the expenses related to your mortgage including your interest and repayments. It is also a good time to consider how much coverage you should take out to be truly protected.
  • Waiting period. If something happens to the main income earner of the family there will be enough emotional turmoil in the house without adding financial problems, so make sure that your benefit pays out as soon as possible so your family isn’t put under financial stress.
  • Your dependents. Consider whether you have children, or even ageing parents, who depend on you, and how long they are likely to be dependent, which helps you decide on the level and the term of cover.
  • Other income. You may be able to look at lower levels of cover if your family has other sources of income, such as investments, or assets which could be sold. At the same time you don’t want your family to sell investments to pay the mortgage and then be left without any other assets – and where does the money come from when there’s nothing left to sell?
  • Your risk factors. The costs of mortgage protection can vary depending on your health and lifestyle factors, so you may need to seek out a specialised insurer who has experience in catering to your needs.
  • The provider. As well as insurers who specialise in certain health and lifestyle factors, when comparing insurers make sure you choose an established and well-respected company, and one that is friendly and easy to deal with.
  • Self insurer. You may be considering saving up to create a financial cushion in case you lose your job or can’t work, as there are no conditions, no eligibility, no waiting periods and you can invest the money in the way you choose. This may be an option if your employer offers a generous sickness benefit policy, or if you have a partner who earns a good salary and can cover the cost of the mortgage, but this is something to discuss with your financial planner.

Remember that as with most forms of insurance, the cost of the premium is determined by a combination of your cover amount and your risk factors. The waiting period you opt for and the benefit period you choose also influence how much you pay for your mortgage protection insurance. Some insurers have extras you can add to your policy to help you cover the cost of your other household and lifestyle bills in case you can’t work.

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