How to protect your home with mortgage protection insurance

How long could you continue to pay your mortgage if your income stopped today? All too many Kiwis are three weeks away from financial disaster.

Even if you could keep your home loan repayments up for three months, you might want to consider taking out mortgage protection insurance (also known as mortgage repayment cover or home loan insurance), or its cousin income protection insurance.

Consider this: according to actuaries four in every ten Kiwi men and six of ten women are likely to take 30 to 90 days off work due to an illness or accident before they turn 65.

ACC might cover the majority of your salary if it’s an accident. If you’re ill, however, you’ll get sickness benefit. That’s $320 a week for a family. Could you survive on that?

Mortgage or income protection insurance can cover either your mortgage payments or a portion of your entire income if you lose your job, have an accident, or become ill.

The three main covers you’ll be offered in a mortgage or income protection policy is: redundancy, temporary and/or permanent disablement through illness or accident, and life insurance.

Here are four tips to help you find the right policy:

1. Shop around.

You don’t have to buy mortgage protection insurance from your bank. Check what the other banks and insurance companies are offering. You shop around for interest rates and should do so also for mortgage protection insurance. Insurance brokers and some mortgage brokers can compare policies for you ““ although they don’t usually include bank policies in the comparison because they don’t earn commission from them.

2. Watch out for policies that don’t cover redundancy.

You’d think that mortgage protection cover would automatically cover you for redundancy. That’s not always the case. It may do with policies issued by banks. Most of the insurance companies don’t offer redundancy cover. Those that do, such as Asteron, offer it as an optional extra.

3. Check how long you’re covered for.

Some mortgage repayment policies cover you for six months out of work. Others for a year or two. Or you might get six months redundancy cover and two years for illness or disability. That makes sense. Most people do find another job in time. If however they’re diagnosed with cancer, motor neurone disease, or a host of other illnesses they may never work again or at least have an extended period of time off work. A small number of policies cover disability until retirement age.

4. Beware of pre-existing conditions.

You won’t be covered for an illness that you already had when you took out the policy. That’s the case even if you didn’t know you had it. You might, for example, have seen the doctor for dizziness. If you take out the mortgage repayment insurance after the doctor’s visit and later find the dizziness was a precursor of multiple sclerosis, you won’t get a payout.

Finally, don’t confuse mortgage repayment insurance with lenders mortgage insurance (AKA mortgage indemnity insurance). When you take out a home loan you may have to pay for lenders mortgage insurance. Even though you pay the premium, it’s the bank that gets the pay-out if you default on your home loan repayments. Then the insurance company goes after you to recover its money.

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