Thursday, 13 September 2012

What is mortgage protection insurance?

If you ever take out a home loan banks will normally try and sell you mortgage protection insurance.  This post will cover what mortgage protection insurance is and whether you should have it.

Note that this is different from the mortgage insurance that banks make you take out if you have higher than their cut off LVR ratio (in Australia this is above 80%).

What is mortgage protection insurance

This is probably one of the easiest types of insurance to understand.  Quite simply it is an insurance product which pays your mortgage only in the event that
  • You are totally and permanently disabled
  • You are temporarily disabled and unable to work
  • You lose your job (involuntary redundancy)
Note that this will not cover your medical expenses, nor will it provide an income for you to live on.  The money gets paid straight to the bank to cover your mortgage.

Should I get mortgage protection insurance?

As with all types of insurance it really comes down to your risk profile.  Most people take out this type of insurance to cover them in the event that they lose their job - that way they will still be able to keep their house and continue making payments. 

You need to weigh up your own situation when making a decision.  Things to consider include
  1. What sort of other insurance cover do you have? 
    • If you have TPD insurance and income protection insurance this should cover you if you are disabled (even for a short period of time)
    • What you are essentially buying therefore is insurance in the event that you lose your job
  2. How skilled are you and how easy would it be for you to get another job
    • If your job is in high demand and it would be easy for you to get another job is it really worth paying an insurance premium for a product that you are barely able to use? 
    • Only you will be able to answer the above question but for me the answer was no.
  3. What sort of buffer do you have in your mortgage
    • Some people only make the minimum mortgage repayments each month and so have no buffer at all
    • I tend to keep a significant amount in my mortgage offset account which means that even if I did lose my job I have enough money in there to cover the mortgage repayments for 2 years without paying a cent
    • Note that my buffer was not always this big - I just kept adding to it every month.  Really as long as I have a 6 month buffer I'm pretty comfortable.
I think that this is an 'extra' cover that only people who are particularly vulnerable or risk averse should have.  I think there are enough ways to mitigate the risks to make this insurance an excess but again if this insurance allows you to sleep better at night then you should probably go for it.

What are the things I should look out for when taking out mortgage protection insurance?

As with all insurance policies there are several things that you should look out for in the contract.  Read the contract and make sure that you understand exactly what you are buying:
  1. Exclusion periods
    • This relates to both how quickly you can claim after taking out the policy AND how quickly the policy starts to pay out. 
    • The second point is actually the more important one because if there is a one to two month lag between claiming and payout then you need enough of a buffer to cover you during this period
  2. Exclusions around claiming
    • You need to understand what you can and cannot claim for
    • If you are fired for reason will your insurance still cover you? 
  3. Maximums (both on cover and time)
    • The insurance cover is generally very high (~$10m) but may be lower so make sure you check this
    • Also you need to see how long the insurance will continue to pay your mortgage

As mentioned above I think that people need to ask the question "do I really need mortgage protection insurance?".  I personally think that it is probably one step too far - I think having income protection insurance as well as TPD insurance are more than enough however given the size of the market it appears that others feel differently.

Do you have mortgage protection insurance?  Do you find it good value for money and have you ever claimed?  Please comment below.

You May Also Like:
What is income protection insurance?
What is TPD insurance?
Should I get life insurance?
Choosing the right health insurance


  1. I see thanks for clarifying this particular mortgage insurance because I thought when I lose the job I will no longer have the chance to pay the house.

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  2. Â Contacting an insurance agent to get professional advice on which type of life insurance is right for you will give the information you need to make t hat choice.

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  3. I think there are lots of policies like insurance policies you should buy like life insurance and all. Even this is best idea to manage your funds with security of your life.

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  4. This comment has been removed by the author.

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