Mortgage Protection vs Life Insurance: What's the Difference?
13 Mar 2024 • Products
Mortgage protection insurance safeguards your home loan in the event of death, disability, or (in some cases) involuntary redundancy.
Your mortgage is usually your biggest debt, and Mortgage Protection Insurance ensures that you, and your family, will continue to have that security in the event of your illness or death.
It has become less common and very few suppliers offer this cover, but your lender or mortgage broker may offer you this option.
What does it cover?
Generally, Mortgage Protection Insurance covers payments toward your home loan ONLY in the following circumstances:
A lump sum on your Death or Terminal Illness diagnosis.
A payment in the event of injury or serious illness, this can be a portion of the overall cover or a monthly payment for a period of time.
Some policies cover monthly payments in the event you have involuntarily let go from your job (but not if you quit!)
What doesn't Mortgage Protection Insurance cover?
As product that is not underwritten, MPI offer does not cover pre-existing conditions. In some cases, any issue you had noted by a doctor in the year prior to your policy start is unlikely to be covered, and in some cases for up to 5 years prior to your cover.
You also may not be covered if you work part-time, casual, contract, or for less than 20 hours per week.
What is the difference between Mortgage Protection Insurance and Leaders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) protects the leader from the risk that you will default on your mortgage. While you pay for this, it does not provide you with cover and you can't claim on this insurance, only your lender can. It is generally mandatory if you have less than 10% mortgage down payment.
Mortgage Protection Insurance (MPI), on the other hand, is cover you take out, to protect your ability to pay back the loan.
In short - LMI protects the bank, MPI protects you
What does it cost?
The costs for this kind of cover will vary depending on your circumstances. It will take into account:
The size of your mortgage
Your repayment amounts
Your age
Do you hold the policy with a partner?
The details of your policy
What's the catch?
Mortgage Protection Insurance came under heavy fire during the banking royal commission, with ongoing class action lawsuits about the quality of the cover historically offered.
If you are considering this kind of insurance you should know it's has strict rules about sales practices following the royal commission where the regulator described it as "extremely poor value for money" Check out what Moneysmart have to say and their guidance.
That sounds rubbish. What are the alternatives to Mortgage Protection Insurance?
Well, this is a life insurance site so... it's life insurance.
The various types of life insurance offer a comparable, more flexible and more reliable cover in the event you need to claim.
Comparable income protection is the closest cousin with a monthly benefit in the event of illness or injury. But any Life, TPD or Trauma cover will also provide lump sum payments to support you and your family.
Flexible you are covered for your needs and can limit the cover to your mortgage or extend it to cover living costs and other overheads. It can cover as little or as much as you like. Plus, the insurance company aren't going to limit it to just mortgage payments.
Reliable Because life insurance is underwritten at point of purchase you can be sure that there will no unexpected pre-existing conditions popping up at time of claim. Let's face it, the last thing you want when you need to claim is a battle with your insurer.
How would Income Protection work to replace MPI?
Income protection replaces your income (or a portion of your income) monthly for the period you select (your benefit period).
Benefits are usually available in 2 and 5 years, some insurers offer to age 65.
So, if you want to protect only your mortgage, you could choose a monthly benefit that replaced your mortgage payment amount which would then be paid in the event of temporary illness.
How would Life and TPD insurance replace MPI?
Life and TPD cover pay a lump sum amount in the event you are permanently unable to work or in the event of your death. In this case you could select a cover amount that equalled your mortgage amount.
A case study: How do all those covers work together?
Anne is 34 with 2 children aged 6 and 10. She recently got a mortgage of $300,000. Her repayments are $2,000 per month and she has 25 years remaining on her mortgage. Anne wants to make sure her children's home is secure in the event of her illness or death. She has 1 month of sick leave at her job.
Anne gets income protection of 70% of her current income, which will cover her living expenses including the mortgage repayments of $2000 per per per month, with a one month waiting period. She takes the cover for two years.
This means that if she falls ill, after the first month of sick leave pay, her income protection cover will kick in and cover mortgage payments.
She takes out Life with linked TPD of $290,000 (the amount remaining on her mortgage if she pays the 2 years of income protection cover). This means that if Anne is permanently unable to work, or passes away, the home mortgage will be covered. While this might not cover all the needs Anne, or her children if she passes away, might encounter but it will at least least secure the family home for her and her children.