Alongside all the excitement that comes with purchasing a new home (especially for first-home buyers), there’s a long to-do list that needs ticking off. Taking out insurance is usually near the top, like house and contents insurance that gives homeowners protection against worst-case scenarios.
There’s another type of coverage that’s likely to catch your eye as a homeowner – mortgage protection insurance. But is it necessary when buying a house?
Buying a house – what insurance do I need?
Buying a house is a major financial decision, so it makes sense that it needs to be protected. Most lenders these days require you to have certain insurance cover in place when you apply for a mortgage.
Here’s a quick recap of the different insurance policies you might be considering:
House and contents insurance – required by lenders
House insurance covers the ‘physical property’ of your home – if it’s destroyed or damaged, you’ll be able to rebuild or make repairs. Contents insurance covers any damage or loss to the things in your home.
The value of your house and total contents is an agreed-upon sum that the insurer will pay out in the event of an incident or disaster, and is a capped limit of what you can claim.
Life insurance – not required by lenders
Most people take out life insurance when they buy a home or start a family, to safeguard their partners and children should the unexpected happen.
Life insurance protects your family with a lump sum paid out on the death of the person insured. It can be used by the family to pay off the mortgage or cover everyday expenses. This insurance will replace the family’s income so they can maintain their quality of life.
Mortgage protection insurance – not required by lenders
Other types of cover can be added to a life insurance policy including income and mortgage protection insurance that cover your income and mortgage should you be unable to work.
Mortgage protection insurance covers your mortgage repayments when you’re unable to work due to health reasons, such as illness, disability or mental health conditions, for a set period as indicated in your policy document. With mortgage protection insurance, you can choose how much cover you need, the waiting period and the payment period. Each one of these has an impact on the premium of your insurance. You can also add cover for redundancy with some insurers.
The difference between mortgage protection and life insurance
On the surface, mortgage protection and life insurance look like they do the same thing, but some key differences will help you decide which type of insurance best suits your circumstances.
• Type of cover. Mortgage protection covers home loan repayments if you lose your job, you’re unable to work for health reasons or you are disabled. Life insurance covers your family or loved ones if you die or are diagnosed with a terminal illness.
• Type of payment. With mortgage protection, your insurer will pay out regular amounts to cover your home loan repayments for a set period of time. With life insurance, the pay-out is usually a lump sum.
For more information on the benefits of mortgage protection insurance and how ACC fits in, check out this blog.
Why consider mortgage protection insurance when buying your first home
A first-home buyer scenario
Jess and Liam have been saving for a home deposit for five years. With their combined KiwiSaver and a Kāinga Ora First Home Grant, they have enough to put 20% down on a house.
When arranging their home loan with their mortgage broker, Jess asks about life insurance. The broker tells them that many first-home buyers consider getting life insurance when they sign up for a mortgage, so they organise to speak with an insurance broker.
Their broker talks them through the benefits of life and mortgage protection cover. In the end, Jess and Liam decide to get a bit of both. The life cover protects them against some of the financial risks of death and terminal illness and the mortgage cover provides reassurance that they’ll be able to afford repayments if one or the other can’t work for a while, due to medical reasons.
The right amount of protection for you
While mortgage protection insurance isn’t a requirement when taking out a home loan (unlike house and contents insurance), many New Zealanders worry about what would happen to the family home if they were unable to pay their mortgage. Mortgage protection insurance helps reduce that anxiety. To work out how much cover you may need, there are several things to consider, including the size of your mortgage, the number of dependants and other financial obligations you have.
Considering adding mortgage protection to your existing life insurance policy? Talk to an expert at Global Finance today.
**Underwriting criteria and insurer terms T’s and C’s apply