What is Mortgage Protection Insurance?

Mortgage protection insurance is a form of life insurance that will assist with your outstanding mortgage (or part of it) if you die or become unable to make mortgage repayments because of a disability, an illness, or job loss.

It typically runs for the duration of your mortgage and ensures that your mortgage repayments will be paid for if something happens to you. This form of insurance is designed to prevent the bank from losing money on their loan if something happens to you.

Compared to most other types of life insurance, however, mortgage protection insurance is often more expensive. It’s also usually offered only by banks and mortgage brokers because of its specialised nature.


How Does it Work?


Many mortgage protection insurance plans come in the form of term life coverage or combined term life and TPD insurance cover. In the event of your death, serious disablement, or job loss, mortgage protection insurance will provide payments to you or your estate (typically through lump sum payments) that you can use to meet your mortgage repayments. If the remaining mortgage has been fully paid for and there are remaining payment benefits left, then this amount will be transferred to your family or estate.


What Does it Cover?


Mortgage protection insurance covers a variety of causes that prevent you from paying your mortgage repayments. Premature death is the primary cause covered by most policies, followed by other things including serious disabilities and redundancies.

It’s important to remember, however, that different providers will have different policies and guidelines for mortgage protection insurance. Some plans only cover premature death, while others are more flexible and provide cover for disability or unemployment as well.


What are the drawbacks?


Mortgage protection insurance solely covers your mortgage. As you would know, your mortgage is simply a part of your day to day expenses and simply covering your mortgage will not alleviate the financial strain of being unable to work. As well as this, mortgage protection insurance is often more expensive than an income protection policy is while offering less comprehensive protection.


How Does it Differ From Lenders Mortgage Insurance?


Mortgage protection insurance is often confused with lenders mortgage insurance (LMI), which is completely different.

First, mortgage protection insurance insures you as the borrower of the loan in your mortgage. Lenders mortgage insurance, on the other hand, insures the lender. Mortgage protection insurance is also designed to protect you if you’re unable to pay your mortgage repayments, while lenders mortgage insurance is designed to protect your lender if you default on your loan or become unable to pay it back.

Second, mortgage protection insurance is often extra cover that you get to protect yourself and your family. LMI, on the other hand, is insurance that you pay for as security to your lender to protect them from such events. LMI is typically added on top of your home loan, whereas mortgage protection insurance is a separate expense.

Third, LMI is often arranged by the lender to protect themselves if you default on your home or property loan. Mortgage protection insurance, meanwhile, is something that you arrange as the borrower of the loan.


How is it Useful?


Mortgages are big loans that require a steady and reliable financial source (i.e. a job) to pay back in full throughout its life. If your finances for paying this loan cease (whether because of death or other reasons like disability or unemployment), then it can put a significant strain on your family’s future. Mortgage protection insurance, however, can help prevent this by providing financial assistance for meeting your mortgage repayments, even in the face of financial or personal loss.

It's important to note that, in this regard, these benefits are similar to those offered by other forms of life insurance like income protection, TPD insurance, or trauma insurance. Its usefulness, therefore, will depend on your particular circumstances.


What Factors Should I Consider?


Like with other forms of life insurance, there are several factors you should consider before getting mortgage protection insurance. Many of these are also the same factors that insurance providers use to evaluate your application and create conditions for your policies.

  • Age – The number of employable years you have remaining can predict how much income you’ll receive over your lifetime. It can also influence the price of your insurance premiums.
  • Health – The fewer medical conditions you have that require financial resources, the better your premium structure will be.
  • Occupation – If you hold an occupation that’s considered high-risk or hazardous, then you may have to pay higher premiums to make up for the higher risk.
  • Family Structure – Bigger families usually mean more financial commitments, which could affect your ability to make mortgage repayments if something happens to you.
  • Financial Stability – Your amount of savings and liabilities can provide a picture of how much mortgage protection insurance you might need if you die, become disabled, or lose your job.
  • Monthly Income – This can affect how high your monthly premium will be and how much your mortgage protection insurance can cover.
  • Amount of Mortgage Left – The larger your mortgage loan remaining, the more mortgage protection insurance you’ll often need.


Is Mortgage Protection Insurance Right for Me?


It depends. Every case is different, and the answer will be different for every person.

In many cases, mortgage protection insurance can be unnecessary, especially if you already have a strong and effective insurance portfolio. You might also find that other forms of life insurance (i.e. income protection, TPD insurance, or trauma insurance) may be more appropriate for your case, even if you’re already paying off a mortgage.

To determine whether you need mortgage protection insurance, it’s best that you discuss your needs with a qualified insurance specialist. Feel free to contact us if you need help comparing different types of life insurance and finding the most appropriate plans for your needs.

Whatever type of insurance you decide to get, don’t forget to compare life insurance plans from different providers and to get life insurance comparison quotes before committing to a policy.

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