Insurance
5 min read
Author: Darryl Scott
Darryl Scott, Insurance Adviser
Reviewed by: Bill McGavock
Insurance adviser with over 25 years of experience
Mortgage Protection Insurance helps you pay your mortgage even if you’re sick and can’t work. It’s a bit like income protection insurance, but there are a few important differences.
I’ve been involved in insurance for over 20 years. Over that time people often ask me: “Do I really need mortgage protection insurance? How much does it cost? And is it worth it?”
These are all the questions we’ll answer in this article.
Mortgage protection cover helps pay your mortgage if you can’t work.
So think about it this way: What would happen if you got sick and lost your income?
You might find it difficult to pay your mortgage. After all, your mortgage repayment is likely your largest household cost.
What happens if you can’t pay your mortgage? You may be forced to sell and need to rent somewhere else.
This is stressful. Not only have you lost your income; you may also lose your house. Through that process, you may also lose a lot of money (for instance, if you sold at the wrong time in the market).
That’s where mortgage protection insurance comes in. It means that even if you lose your income, you can still live in your family home.
A lot of people get sick at some point in their life. In New Zealand, 1 in 20 adults are diagnosed with coronary heart disease over their lifetime (Heart Foundation, 2017).
It’s estimated there are 60,000 stroke survivors in New Zealand; many are disabled and in need of daily support (Stroke.org.nz, 2018).
When this happens, your income will likely take a hit. That’s why some people choose to get mortgage protection insurance.
Mortgage protection insurance is a variation of income protection.
So, while some may use the two interchangeably, there are differences.
When you take out mortgage protection insurance, you agree on how much income you are insuring.
That means you don’t have to prove you are earning a certain income when you make a claim.
That’s different to some other types of income protection insurance. In those cases, you need to prove you were recently still earning that income when you make a claim.
But, the biggest difference is that you can claim mortgage protection insurance on top of ACC.
So if you get injured and ACC pays you, you can still get paid through mortgage protection insurance.
It’s really difficult to say how much mortgage protection insurance costs. There are a lot of factors that impact how much you pay.
Here are a few scenarios:
Steve is a plumber. He is 24 and earns $80k a year (before tax).
He can insure himself for up to $36k (45%) of income. His fortnightly premiums could be:
So, the cost of his insurance ranges between 0.9 – 1.2% of his pre-tax income.
Karen is 45 and works in accounts. She earns $120k (before tax). She decides to take out mortgage protection insurance of $54k. Her fortnightly premiums are:
So, the cost of her insurance ranges between 1.6 – 2.5% of her pre-tax income.
Mortgage protection insurance isn’t for everyone. Let’s take an honest look at the pros and cons.
Mortgage protection insurance is an agreed-value product. That means the income you insure is agreed upfront.
If your income goes down, you don’t need to prove you are still earning that higher income.
If you do need to make a claim (and get a payout), you don’t have to pay tax on the money you receive.
That is different from some types of income protection insurance where you do pay tax.
This is unique. Most other insurances are offset against ACC.
That means if you are paid by ACC, you don’t also get paid by the insurance company.
So, let’s say John has income protection insurance. He comes off his mountain bike and breaks his leg in 2 places. He can’t work anymore.
Because he was injured (not sick), ACC pays him 80% of his income. Usually, he won’t get paid out by his income protection insurance. He’s already getting paid by ACC.
But what if he had mortgage protection cover instead? He’d get paid out by ACC and the insurance company.
Some income protection cover lets you insure up to 75% of your income.
Mortgage protection insurance will only allow you to insure up to 45% of your income or 115% of your mortgage repayment.
With income protection insurance, the cost of your insurance (the premiums) may be tax deductible.
But mortgage protection insurance is not tax deductible. That has some benefits; if you need to make a claim, your payout isn’t taxed either.
As with any insurance, mortgage protection cover can be a good idea, but you need to get the right type.
You can decide that mortgage protection insurance is right for you, but then you still need to find the right insurance company and set it up properly.
After all, mortgage protection insurance is complex. So, what you need will differ from what the next person reading this article needs.
That’s why many Kiwis decide to speak to an insurance adviser. We don’t charge anything. We get paid a commission if we can help find the right insurance policy for you.
If you want to talk about income protection insurance, you can always email me directly – darryl@opes.co.nz.
Darryl Scott, Insurance Adviser
Darryl Scott is an Insurance Adviser at Opes Insurance in Auckland with over 30 years of Industry Experience. Darryl provides personal risk advice and claims assistance for individuals, families or businesses that require a functioning plan to provide funds in the event of an untimely death or major illness or injury.
