Mortgage protection insurance is easy to confuse with lenders mortgage insurance. They sound similar and they do opposite things. One protects the lender. This one protects you.
What does it actually cover?
It is an optional policy designed to keep your mortgage repayments going if you cannot earn. Cover typically responds to involuntary unemployment, serious illness, injury or death, depending on the policy.
The point of it is time. If something happens, the policy covers repayments for a period so the household is not forced into selling the house at the worst possible moment.
How is it different from lenders mortgage insurance?
This is the single most common mix-up in home lending, and the difference matters.
- Lenders mortgage insurance is usually compulsory when your deposit is under 20%. You pay it, but it protects the lender if you default. If the insurer pays out, it can still pursue you for the shortfall. More on LMI.
- Mortgage protection insurance is always optional. You pay it and it protects you, by covering your repayments if you cannot.
Paying LMI does not give you any personal cover at all. People sometimes assume it does, which is a costly assumption to make.
Do you already have similar cover?
Worth checking before you buy anything, because a lot of people are already covered and do not realise.
Many superannuation funds include default life and total and permanent disability cover, and sometimes income protection. If you already hold income protection, that generally covers a percentage of your income rather than your mortgage specifically, which may serve the same purpose more flexibly.
Duplicating cover you already have is one of the more common ways people waste money on insurance.
What to check before you sign
- The waiting period. How long after an event before the policy starts paying
- The benefit period. How long it keeps paying, which is often capped at a set number of months rather than running indefinitely
- Exclusions. Pre-existing conditions, casual or contract employment, and self-employment are all commonly excluded or treated differently
- What counts as unemployment. Redundancy usually qualifies. Resigning does not
- Whether the premium is stepped or level, because stepped premiums rise with age and can become expensive at the point you most want to keep the policy
Do you need it?
It depends on what would happen if the main income stopped for six months.
A single income household with a large mortgage and little in savings is in a very different position from a two income household with a buffer. If losing one income would put the house at risk within months, some form of cover is worth looking at seriously.
Insurance is not our field, so this is general information rather than advice. A financial adviser can tell you whether this specific product suits your circumstances, or whether cover you already hold does the job. How to choose a financial adviser.
What we can help with is the loan itself. If repayments are the pressure point, sometimes the answer is the loan structure rather than an insurance policy. What to do if you are struggling with repayments.
Common questions
Is mortgage protection insurance the same as lenders mortgage insurance?
No, and they are close to opposites. LMI is usually compulsory when your deposit is under 20% and it protects the lender if you default. Mortgage protection insurance is optional and protects you by covering your repayments if you cannot earn.
Is mortgage protection insurance compulsory?
No. It is always optional. A lender can suggest it but cannot require it as a condition of the loan.
Do I need it if I already have income protection?
Often not. Income protection generally covers a percentage of your income, which can cover the mortgage and more besides. Check what you already hold, including any default cover inside your superannuation, before adding another policy.