If you ever become seriously ill or suffer a disability that means you have to take time off work, mortgage protection insurance is scheme that can help you keep your mortgage repayments up to date (and avoid defaulting on your loan). If the worst happened and you died, then the insurance would pay off your mortgage, leaving your family free of the burden.
The premiums (your monthly payments) for Mortgage Protection Insurance are different for everyone as they are calculated based off the size of your mortgage, your income, age, health and the current market price for your home. Your occupation also plays a role in the calculation of your monthly premiums because people who work in high risk roles are more likely to end up with a disability, which their insurance company would have to pay out on.
The burning question most people have when entering the real estate market is whether or not mortgage protection insurance is really worth it. To help you figure this out for yourself we’ve laid out the pro’s and con’s below:
The Benefits of Mortgage Protection Insurance
The key benefit of taking out mortgage protection insurance is the peace of mind that comes with knowing that in the event you passed away or became disabled, the sudden loss of income would not result in your family losing their home.
It’s also significantly easier to get accepted for mortgage protection insurance, than life insurance or disability insurance as age and pre-existing medical conditions are viewed less harshly by insurance companies. If you can’t take out life or disability insurance because you don’t meet the criteria, then mortgage protection insurance is a good way to help make sure that you and your family are looked after.
In an extremely stressful time when your family has lost a loved one or is dealing with a disability and the problems that go with it, do you really want them worrying about how to pay the mortgage?
The Drawbacks of Mortgage Protection Insurance
Most policies also come with a maximum pay-out limitation. This means if you lost your job you wouldn’t receive the full amount of lost wages, you would only get a percentage of them (a term you would have agreed to, perhaps without realising it, when signing the policy).
One of the other drawbacks, is that this insurance is that it provides a declining-benefit policy. Basically your monthly premiums will remain a fixed amount for the life of your mortgage, but with every month that goes by your mortgage is reduced (and the amount the insurance company will need to fork out to pay it off is reduced too). So at the beginning of the policy the financial benefit lies with you and the insurance company has the higher risk, as time goes by the pendulum swings the other way and the insurance company gains most of the financial benefits.
Alternatives to Mortgage Protection Insurance
A full life insurance policy with mortgage and income protection built into it, offers more flexibility and returns than mortgage protection insurance alone. For example in the event of your death, under life insurance the funds would go to your family to use as they wanted to. However with mortgage protection insurance, the funds would bypass your family and go directly to you mortgage provider.
If you happen to have an extremely small mortgage with low repayments then mortgage protection insurance may not be the best route for you. Depending on your circumstances you may find it more beneficial to underwrite yourself and set aside 3-6months worth of salary in the bank or in a low risk investment fund that you could access quickly. If considering whether it’s better to get insurance or underwrite yourself, we strongly recommend talking to a registered or authorised financial advisor to seek a professional opinion.
We recommend taking out a mortgage protection insurance scheme that suits your personal needs, as it’s a small price to pay to not to lose your family home.
There are a range of policies and providers out there and you are in no way forced to take out insurance with the bank that your mortgage sits with. The policies vary from insurance provider to insurance provider and are affected by your individual circumstances, so it’s important to shop around to find a policy that provides the right level of cover at the right monthly price for your needs.
If you’re feeling confused and aren’t confident to do it alone, then talk to a financial advisor and have them present you with options from the various providers along with their recommendations.
Article ref: mytopagent.co.nz