What is mortgage protection insurance?

Mortgage protection insurance is an optional form of insurance available to some home loan customers. A form of consumer credit insurance (CCI) like personal loan protection insurance, mortgage protection insurance is designed to provide a payout should you become unable to meet your home loan repayments in certain circumstances, but it has a number of risks and potential drawbacks that you should be aware of before applying for a policy.

Mortgage protection insurance in Australia generally works like an income protection or life insurance policy that only covers home loan costs. It can potentially pay a benefit if a policyholder can no longer meet their home loan repayments. It should not be confused with lenders mortgage insurance (LMI), a separate type of cover which protects lenders should a borrower default on their repayments, but which some borrowers with low deposits have to pay for.

Mortgage protection insurance has become less common in recent years than it used to be, and major lenders such as Commonwealth Bank and NAB have stopped selling it to new customers. However, it is possible your lender or mortgage broker may offer it to you as part of the home loan application process.

What does mortgage protection insurance cover?

Depending on the insurer and policy, mortgage protection insurance may be able to provide a monetary benefit to a policyholder or their loved ones if the policyholder:

• loses their job involuntarily
• becomes unable to work due to illness or injury, or
• passes away.

For example, if a policyholder dies and their loved ones successfully lodge a claim under a mortgage protection policy, the insurer may pay a one-off lump sum towards the outstanding balance on their home loan. Alternatively, if a policyholder who normally works full-time loses their job and their insurer approves their claim, they may be able to receive regular insurance payments to cover their home loan repayments for a limited period of time.

Bear in mind that mortgage protection insurance is usually linked specifically to home loan costs. It will generally not cover any of the policyholder’s other expenses as a life insurance or income protection policy might.

How much does mortgage protection insurance cost?

The cost of mortgage protection insurance can vary depending on a policyholder’s personal circumstances, including:

• the size of their home loan
• the size of their regular repayments
• whether the policy is just in their name or held jointly with another person
• their age
• the specific insurer they choose
• the details of the policy, including specific inclusions or exclusions.

Moneysmart.com.au states that there are rules around when you can be sold mortgage protection insurance. This comes after CCI, including mortgage protection insurance, attracted heavy criticism for offering poor value to consumers. If you buy a credit product, a salesperson (such as a mortgage broker or a loans officer) can tell you about the insurance at the time you get the loan, but are unable to actually sell it to you until four days have passed. This gives you some time to compare your options and consider if it’s worth it.

“Salespeople get a commission if you buy CCI. They may try to pressure you by offering CCI when you’re trying to get credit or a loan. You do not have to buy it,” Moneysmart states. “If they don’t wait before selling it to you, you have the right to cancel the insurance and get a full refund.”

Is mortgage protection insurance worth it?

Whether mortgage protection insurance is worth its cost for you will depend on your personal circumstances, but if you’re considering taking out a policy it is worth bearing in mind the following points, which were among the findings from ASIC’s 2019 review of the CCI industry.

• The regulator described CCI as “extremely poor value for money”, noting that customers received back only 19% of the premiums they paid lenders for the cover.
• CCI sales tactics and practices often caused harm to consumers, according to ASIC. For example:
  • some consumers were sold CCI despite being ineligible to claim under the policy they were sold
  • lenders often used telemarketers to sell CCI, and these staff used “unfair sales tactics” such as failing to inform consumers of exclusions under the policy.
• Some consumers were incorrectly charged for CCI, including some who were charged premiums despite having already paid off their loan.
• Many lenders lacked processes to help customers experiencing financial hardship make a CCI claim.

Additionally, bear in mind that mortgage protection insurance policies often place limits or restrictions on when and how much a customer can claim. For instance:

• The benefits a policyholder or their family can receive may be capped. This means the money they get may not cover the entire home loan amount, or the payments may stop after a set number of days or months.
• It is common for certain claims or policyholders to be excluded. For example, a policyholder may find themselves ineligible to make a claim if they were self-employed or working part-time before losing their job, or if they had a pre-existing medical condition.
• There may be waiting periods on some policies, meaning a policyholder may be unable to make a claim or receive benefits for a certain amount of time.
• Mortgage protection insurance payouts can generally only be used to help cover home loan expenses, not spent on other living costs.

You may also want to think carefully about how mortgage protection insurance stacks up against life insurance and income protection insurance, since even though they tend to cover similar events, life and income protection insurance payments tend to be more flexible about how the benefits can be used. It is possible you may not need mortgage protection insurance, particularly if you already have life and income protection cover, such as through your super fund.

What the pros and cons of mortgage protection insurance?

If you heed the words of industry bodies like ASIC, you may well conclude that the potential cons of mortgage protection insurance outweigh the pros. As mentioned above, there are a number of potential pitfalls to be wary of, including the fact that regulators have called this type of insurance “extremely poor value for money”, and warned consumers to be wary of exclusions and strict benefit caps.

If you’re weighing up whether mortgage protection insurance is right for you, Moneysmart advises taking as much time as you need to make sure you need it before committing to a policy. Read all important documents, such as the Product Disclosure Statement and Target Market Determination.

If you’re experiencing financial hardship, it could be worth contacting your lender about its financial hardship policy, or speaking to a financial counsellor. You can contact the National Debt Helpline on 1800 007 007 and ask to speak to a counsellor in your area confidentially and for free.

Originally by Tom Letts
Cover image source: Sorapop Udomsri/Shutterstock.com