Mortgage protection insurance vs. life insurance - what's the difference?

Deputy Editor · 18 June 2021
If you’re looking to help protect yourself and your family financially in the event that the unexpected happens, mortgage protection insurance and life insurance are two potential options. But what’s the difference, and in what circumstances might each be appropriate?

Let’s take a look at these two product types individually and explore some of the key differences between them.

In this article:

What is life insurance?

Life insurance is a type of insurance policy designed to financially protect the loved ones of an individual in the event that the individual passes away. In some cases, it might also apply if the insured person is diagnosed with a terminal illness and has a limited life expectancy.

In the event of a person’s death, and depending on the level of cover in place, a payout arising from a successful life insurance claim could be used as a way of meeting home loan repayments or to pay off the loan entirely. However, unlike a mortgage protection policy (which we’ll discuss below), most life insurance policies are not directly linked to a home loan.

How much does life insurance cost?

The cost of a life insurance policy is likely to depend on a number of factors specific to the person being insured. These can include:

  • Age
  • Smoking status
  • The amount of insurance required (e.g. whether the individual would need cover to pay off their mortgage)
  • Occupation and hobbies
  • Health and medical history
  • Features and inclusions offered by the policy
  • The provider you choose (it could be worth comparing multiple insurance providers)

How do I get life insurance?

Life insurance is generally not offered as part of the process of getting a home loan in the same way that mortgage protection cover sometimes can be. That said, some lenders also offer their own life insurance or sell it on behalf of another insurer, in which case you may be offered life insurance at the time you take out your home loan.

Life insurance policies can also be bought separately from a direct life insurance provider, or arranged via a financial adviser or you may already have a level of cover through your superannuation.

If you’re comparing direct life insurance policies, the comparison table below displays some of the policies currently available on Canstar’s database for a 30-39 year old non-smoking male working in a professional occupation. Please note the table is sorted by Star Rating (highest to lowest) followed by provider name (alphabetical) and features links direct to the providers’ websites. Use Canstar’s life insurance comparison selector to view a wider range of policies.

What is mortgage protection insurance?

Mortgage protection insurance (sometimes called mortgage repayment insurance) is a type of policy specifically designed to cover home owners and their families from the financial impacts of some risks that could affect their ability to pay back their home loan. It’s an optional type of insurance and typically covers things like:

  • Involuntary job loss
  • Injury or illness
  • Death

How does mortgage protection insurance work?

If you’re unable to work for a period, a mortgage protection insurance policy may kick in and cover your repayments while you are not earning your usual income. If you pass away, it may pay out the balance of your home loan – or provide a specific lump sum stated in the policy – to help your loved ones repay the outstanding debt.

Because it can cover the policyholder if they are unable to work, and in the event that they pass away, mortgage protection insurance is in some respects like a combination of income protection insurance and life insurance, albeit with coverage amounts linked to home loan costs specifically. It would generally not cover any of the policyholder’s other expenses or living costs.

How much does mortgage protection insurance cost?

As with many kinds of insurance, the cost of a mortgage protection insurance policy is likely to depend largely on the policyholder’s circumstances and the item being insured – in this case a home loan. But generally speaking, the cost might also be affected by considerations like:

  • The total home loan amount
  • The regular home loan repayment amount
  • Whether the policy is in one person’s name or covers multiple people (multi-policyholder discounts might apply)
  • The age of the policyholder(s)
  • The type of policy and any features included or excluded
  • The insurance provider (again, it may be beneficial to shop around)

Is mortgage protection insurance cheaper than life insurance?

Because the cover provided is typically limited to expenses relating to repaying a home loan, in some cases mortgage protection insurance could be a less expensive option than a life insurance policy. This may not always be the case, though, and you should consider also looking at the level of cover that applies and other relevant factors before committing to a particular type of insurance cover.

According to Moneysmart, an important question to consider around cost is whether the mortgage insurance premiums will be added to your loan amount. If this is the case, interest costs could add considerably to the overall cost of the cover.

Is mortgage protection life insurance worth it?

While this product may offer suitable protection in some circumstances, it’s important to note that as a form of CCI, mortgage protection cover has come under heavy criticism in recent years. Following a review of this industry in 2019, the Australian Securities and Investments Commission (ASIC) found a number of issues affecting consumers. For example, it found that:

  • CCI is “extremely poor value for money”. Across all CCI products sold by lenders, only 19 cents was recovered in claims for every premium dollar which consumers paid.
    • CCI sales practices were harmful to consumers:
    • consumers were sold CCI despite the fact they were ineligible to claim under their policy
    • telephone sales staff used high-pressure selling and other unfair sales practices when selling CCI, and
    • consumers were given non-compliant personal advice to buy unsuitable policies.
  • Consumers were incorrectly charged for CCI, including being charged ongoing CCI premiums even though they no longer had a loan.
  • Many lenders did not have consumer-focused processes to help consumers in hardship make a claim under their CCI policy.

In addition, here are some more factors to consider with mortgage protection insurance:

  • There may be an upper limit on the amount that can be claimed on a policy (i.e. it may not cover the entire loan amount and payments may stop after a limited time).
  • Waiting periods may apply, meaning the policyholder might not be able to make a claim or receive benefits within a certain amount of time of the policy being taken out or a claim being made.
  • There may be conditions and exclusions, such as not being able to make a claim if you are self-employed or work part-time, have a pre-existing medical condition or are above a certain age.
  • This kind of policy only provides cover for mortgage expenses, and would generally not cover the policyholder for other expenses that might arise if they become unable to work or if they pass away.
  • It’s not the same as lender’s mortgage insurance.

Moneysmart advises that sales staff may sometimes “try to pressure you” into purchasing CCI like mortgage protection insurance, and that it’s worth thinking carefully about whether you need it before you commit to a policy.

How do I get mortgage protection insurance?

This kind of policy is sometimes sold by lenders to homeowners when they take out a mortgage. Some lenders may offer their own mortgage protection insurance policies, but it can also be sold by lenders on behalf of a separate insurer.

That said, it is generally not as commonly sold in Australia as it used to be, and several major lenders have stopped offering it to new customers in recent years.

If you are considering taking out a mortgage protection policy, be sure to read the product disclosure statement carefully and check with the provider about any exclusions, waiting periods or other terms and conditions that might apply before proceeding. Bear in mind that you may not need mortgage protection insurance if you already have separate life and income protection cover, such as through your super fund. Seek independent financial advice if you need it.

And remember, if you end up getting into difficulty repaying your loan, you may have other options that mean an insurance policy may not be as necessary, such as using your lender’s financial hardship policy or speaking with a financial counsellor.

Key differences between mortgage protection insurance and life insurance

Here’s a summary of some of the key differences that can typically be found between the two types of insurance:

Mortgage protection insurance Life insurance
Designed to cover An individual’s home loan repayments in certain circumstances, depending on the policy, such as if they lose their job, are unable to work or pass away. An individual’s family or loved ones in the event that the policyholder passes away or is diagnosed with a terminal illness.
Cost of policy depends on


Factors including the total home loan and regular repayment amount, plus risks associated with the policyholder (like age, profession, smoking status). Factors including the value of the policy, plus the policyholder’s risk factors (like age, profession, smoking status).
Benefit payment A regular payment to cover home loan repayments, or a lump sum if the policyholder passes away. Usually a lump sum.
Payable when Following a successful claim, for example when the policyholder is no longer able to work or passes away. Following a successful claim when the policyholder passes away or, for some policies, is diagnosed with a terminal illness.

Are there other insurance options for homeowners?

Income protection insurance

This kind of policy can help cover costs like an individual’s mortgage repayments if they are unable to work, by providing an income stream that replaces part of the policyholder’s regular income.

It can cover individuals for a portion of their lost income, typically up to 75% of gross wages, for a set period due to the following types of events:

  • Involuntary job loss
  • Sickness or injury
  • Total or partial disablement (a lump sum amount may be paid out in these cases)

Like life insurance, income protection policies are not exclusively designed to cover home loan repayments. Instead, this type of insurance is related to the individual’s lost income, and payouts may also be used to cover other expenses.

However, like mortgage protection insurance, some income protection policies have a limited maximum time period during which a benefit will be paid, meaning they may not be a suitable option if you want cover that would pay off the entire balance of a home loan.

Income protection policies typically vary in cost depending on the insured individual’s occupation, as well as risk factors like their age and smoking status. The kind of policy (its benefits and inclusions) and the provider offering it may also impact on the cost.

Like life insurance, income protection policies can typically be taken out either directly from an insurer or via a financial adviser.

Home and contents insurance

These policies are designed to cover a physical property and its contents from some forms of damage and burglary. They can typically be taken out separately (as standalone building only or contents-only policies) or as a combined building and contents policy.

Unlike the other types of insurance policies mentioned above, a home and contents insurance policy won’t cover you if you are unable to make your home loan repayments, but it could be an option worth considering if you are keen to protect yourself from the financial costs associated with certain types of loss or damage to your home or the possessions in it.

Main image source: Nestor Bandrivskyy (

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