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Buying a house is perhaps one of the largest financial commitments of your adult life and protecting yourself against possible risks that could affect your ability to repay your mortgage is a good idea. Here’s a quick look at important aspects of purchasing Mortgage insurance.
What is mortgage protection insurance?
Mortgage protection insurance is a form of insurance that protects your ability to make home loan repayments in the wake of unforeseen circumstances like injury, illness or even death.
How does it work?
Based on the mortgage insurance plan you opt for; you’ll receive an amount in case of unforeseen events that impact your ability to make repayments.
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- Loss of employment due to injury, illness, disability, or other circumstances beyond your control: Your insurance would provide you with monthly funds to cover your repayments for a fixed duration of time. The monthly amount you receive could be more than your repayments based on the policy you buy. Duration for which you receive funds to cover your repayments could range from 3 to 24 months.
- Death: There are two approaches policies take. The policy pays off the remaining loan amount or pays a fixed sum to your estate, which could be greater than the pending loan amount.
How is it different from LMI?
LMI or Lender Mortgage insurance protects the lender’s interest, while mortgage protection insurance protects the borrower in case of unforeseen circumstances. Secondly, LMI is usually bought when the borrower puts up less than 20% of the property value. While mortgage protection usually has no such criteria for purchase.
Things to keep in mind
- Premium and the right amount: Ensure that your insurance provides you with adequate protection. Not only should your insurance cover your repayments in case of unemployment but should offer additional financial support to give you sufficient breathing space to figure out your next steps. Same should be the case during your demise. However, an increase in the insured amount results in an increased premium. To give you a rough estimate – an insurance amount of $300,000 should have a premium of $1.5 to $2 per day.
- The policy becomes active after a period: Most policies have a 12-month waiting period. This duration varies from across different insurance plans. You will not receive coverage for any injury, illness, or adverse circumstances during this period.
- Other avenues of income protection: Super funds also offer many options for income protection that you could consider. In case you’ve already opted for an income protection plan, thoroughly check the benefits it offers. It may be just possible that your existing income protection provides you with sufficient protection such that you may not need mortgage protection insurance at all.