When you speak to your mortgage broker or bank about your home loan they invariably ask you about mortgage protection insurance – why?
It is not just like McDonald’s asking if you want fries with that, it is simply because you have a mortgage which generally means you either don’t have the financial resources not to have a mortgage or you wish to leverage your capital for the maximum return.
Even if you think you are just being “sold” another product, you should take a few minutes to consider why the mortgage broker or bank choose to talk about mortgage cover rather than any other product.
The key thing is you have taken on an additional financial risk by having a mortgage and therefore the prudent thing is to consider all risks.
But There Is Minimal Risk
If things go to plan and nothing happens to you or your property then the risk may be minimal, but there is always some degree of financial risk when you have debt and are therefore committed to paying repayments to a bank or a non-bank lender.
Mortgage protection insurance is considered a very economical way of mitigating this financial risk.
Understanding The Risks With Property Ownership
When you went through the purchase process of your property, you may have already mitigated some risks by having a valuation done and by getting a building report you have secured a couple of key physical risk issues.
But are these the biggest risks?
After you have committed to the property and more importantly the mortgage, the question now changes to; what can take this property away from me?
Damage to the property from something like a fire, can affect the property value. You would insure the house against damage with house insurance, so you can repair or rebuild it and therefore restore the property value.
It is important to maintain the value in your property, as this is what the bank is relying on when they provide you a loan, but you also want to ensure that the value is maintained so that you have choices and can sell the property if you want or need to.
This leads into the next things you need to consider; the non-payment of the mortgage repayments which can happen due to a number of reasons which are unplanned, unexpected and are out of your control;
- Loss of your job through a company restructure and therefore redundancy, meaning you do not have the money to make your mortgage repayments.
- More seriously you are injured or ill and you cannot continue to work to earn an income.
- You have an accident or illness that prevents you working at the same level and earning capacity as you do now – you are still working but earning less.
- You have an illness or accident that prevents you working ever again.
- You develop a terminal illness or pass away.
How Do We Manage These Risks?
Generally the simplest and most cost effective way to manage these risks is by putting in place an appropriate insurance cover to reduce or remove the financial burden in the event of a particular situation or event happening.
This is generally called mortgage protection insurance.
It will include life cover, but we also have critical illness covers, income and mortgage repayment protection as well as permanent disablement which all fall under the umbrella of mortgage protection insurance.
This means should something happen to you and thus something affecting your ability to pay the mortgage repayments, there are a number of solutions to cover all of the points we mentioned above.
How A Mortgage Protection Insurance Plan Works
Let’s start with the list of events mentioned above;
Loss of job through redundancy; we can insure you for this for a maximum claim of 6 months and after any redundancy payment is applied. This does come with a caveat; you must have the cover in place for 6 months before you are able to claim a benefit and when you apply for the insurance you must not be aware of any restructure or layoffs at your place of work.
The first is the mortgage repayment insurance. This pays your mortgage repayments for you if you are unable to work due to sickness or accident. The insurance will continue to pay the mortgage repayments until you are either able to return to work or reach retirement at age 65 or 70.
The next is a traumatic condition or critical illness cover. This pays at a point where you are diagnosed with a critical illness or trauma rather than being dead or disabled. Claims on this cover are generally due to a major illness or health event which force a change in lifestyle, but may not mean you cannot work. Often the approach is to use trauma cover as a financial buffer to get through recovery and finance the change in lifestyle that may be required.
We then look at a total and permanent disability, or TPD as its known in the insurance industry. TPD is a cover that pays if you are disabled permanently and are never going to be able to return to work. There are two types of TPD cover; with own occupation cover, TPD will pay if you cannot return to the job you were in at claim time and any occupation cover will pay if you are unable to do any job you are suited to through training or experience. If you are going to have TPD cover, you want the own occupation version.
The final option is to insure yourself with life cover. Most people will consider cover for at least the value of the mortgage as this will give you or your estate the money required to clear the mortgage and retain your property if you were to pass away or become terminally ill. In normal circumstances, we recommend more than just the mortgage, as there are funeral and final expenses, credit cards and often short-term debt that need to be taken care of, but there may be other assets or funds available to take care of these and even some of the mortgage.
What Alternatives Are There?
The reason that most people have a mortgage is because they did not have the money to purchase the property outright. In this case you have borrowed the money required and have committed to making mortgage repayments until such time that the debt is repaid in full.
The best way to avoid the need for mortgage protection cover is to pay off the mortgage in full and the next best way is to ensure that the income that you earn is not reliant on you.
Paying off your mortgage faster does not mean there is no risk today; however it does mean that the risk declines more rapidly. In this case you still would require mortgage protection insurance, but as your mortgage is repaid the insurance cover can be reduced.
If you have a business or investment that creates passive income then mortgage repayment cover may not be required, or a lesser amount may be required. Rental properties do not generally require mortgage repayment cover as the rent continues to be paid regardless if you are able to work or not. It is also becoming increasingly popular for people to have a passive income from a home business or network marketing type venture and while in most cases the amount of passive income does not start off as enough, with the right business and some focus on the business many people are able to build the level of passive income up which helps enable the repayment of the mortgage more quickly and reduces the need for mortgage repayment cover meaning those savings can also help pay the mortgage faster.
But I Already Have Income Cover
I have income protection and the mortgage repayment insurance sounds like income protection?
To a point, you are correct, it is very similar to income protection but it is cover for the mortgage payments. The major differences are; it is based on your mortgage repayments rather than your income.
There are advantages to having mortgage protection over normal income protection, the primary one being that mortgage cover will not generally be offset against any other income whereas other payments received could be offset against your income protection benefit.
Speak To An Insurance Adviser
Every situation is a little different and the information here is only intended to be of a general nature and should not be relied upon without obtaining full details of the insurance products available and a recommendation of appropriate cover cannot be made without an insurance adviser looking at your situation, your mortgage and understanding how you earn your income.
You want to ensure that you get the best mortgage cover at a reasonable cost.
Mortgage protection insurance is an option worth consideration.