Mortgage protection insurance explained
Mortgage protection insurance is an optional insurance policy that may provide a payout if you’re unable to meet your home loan repayments under certain circumstances. It's different to lenders mortgage insurance (LMI), which protects your lender if you default on your home loan.
The optional insurance, which was once commonly offered alongside a home loan, has become less common in recent years, with major lenders such as Commonwealth Bank and NAB having stopped selling it to new customers.
However, your lender or mortgage broker may offer it to you as part of the home loan application process and, if they do, there are potential risks and drawbacks you should know about before accepting.
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 other expenses 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 there are rules around when you can be sold mortgage protection insurance. This comes after consumer credit insurance (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.
Is mortgage protection insurance worth it?
Whether mortgage protection insurance is worth its cost for you will depend on your personal circumstances.
However, it’s worth bearing in mind the following points, which were among the findings from ASIC’s 2019 review of the CCI industry:
- The benefits Aussies received equaled less than 20% of total premiums paid.
- Some CCI customers’ were incorrectly charged, with some who had already paid off their loan also hit with charges.
- Many lenders lacked support systems to assist customers experiencing financial hardship with submitting a CCI claim.
- CCI salespeople often engaged in unethical sales practices against customers’ best interests:
- Some customers were misled into taking out CCI, despite being ineligible to claim under the cover.
- Important information, such as exclusions, were deliberately left out by telemarketers selling CCI.
Do 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’s 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
Think carefully about how mortgage protection insurance stacks up against life insurance and income protection insurance, since life and income protection insurance payments tend to be more flexible about how their benefits can be used.
You may not even need mortgage protection insurance if you already have life and income protection cover, perhaps through your super fund.
If you’re weighing up whether mortgage protection insurance is right for you, Moneysmart advises taking time 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.
