Life doesn’t always go according to plan. Adverse events often come without warning and can leave you in extreme distress. Having adequate insurance cover can help you in such times by taking some of the financial burden off your shoulders.
Mortgage protection insurance is a consumer credit insurance product designed to cover your mortgage payments in certain circumstances. It helps cover the cost of your regular mortgage repayments if you die or become seriously ill. Depending on the cover you buy, mortgage protection insurance may also help you make your home loan repayments in some cases such as when you involuntarily lose your job.
Is mortgage purchase insurance the same as LMI?
Mortgage protection insurance is not the same as LMI or lenders mortgage insurance. LMI is a type of insurance that protects the lender’s financial loss if you default on your home loan repayments. It doesn’t provide any protection to you (the borrower) in any situation.
A lender will typically ask you to pay for LMI if you can’t pay a 20% deposit for your home loan. However, this requirement may be waived off for certain professionals, like doctors, who are considered low-risk borrowers by lenders. You can speak with a mortgage broker to learn more about low deposit home loans and if you qualify for an LMI waiver.
How does mortgage protection insurance work?
Being able to own a home is almost everybody’s dream. But what if something happens to you and you can no longer repay your mortgage?
Mortgage protection insurance can prevent your dream from turning into a nightmare if you find yourself in a situation where you’re unable to meet your mortgage repayments due to illness or death.
Mortgage protection insurance could help clear your home loan if you were to pass away or be diagnosed with a terminal illness. Depending on the terms and conditions of the policy you buy, mortgage protection insurance can also cover your loan repayments if you are injured or diagnosed with a serious illness and unable to work or earn an income. However, the length of time for which your repayments may be covered will be limited to a few months in most cases. You’ll also typically pay a higher premium to cover a longer period of repayments.
The amount of premium you’ll pay will also depend on your individual circumstances, such as your age, the total home loan amount and the size of your monthly repayments.
Is it worth buying mortgage protection insurance?
Mortgage protection insurance is not compulsory to purchase and is no longer as popular as it used to be. Still, some lenders do offer mortgage protection insurance to their customers, or you may be able to buy it from separate insurers as well.
Whether or not you should purchase mortgage protection insurance is tricky and depends on your personal preferences and situation. However, you should know that some of these policies have an upper limit on the amount you can claim, which means they may not cover your entire loan amount. Many policies also have a waiting period during which you cannot make a claim. It’s important to read the Product Disclosure Statement carefully and check all the conditions and exclusions before you decide to buy a mortgage protection insurance policy.
The Australian Securities and Investments Commission has also warned that consumer credit insurance products like mortgage protection insurance are usually extremely poor value for money. Instead of blindly purchasing a mortgage protection insurance policy, consider finding out more about the product and how it will help you in different scenarios to decide whether it’s worth it or not. You can also speak to a financial adviser to understand the type and level of insurance cover you need.
