Understanding mortgage protection insurance vs. life insurance

You've worked tirelessly to own the home of your dreams. But if you suffered from a health complication, would you be able to cover your mortgage repayments?

Almost half a million Australians turn to government support each year because they're unable to work due to ill health, injury or disability, according to a report by The Collaborative Partnership for Improving Work Participation.

Whether that's because they've been involved in a car accident, or need time off to battle cancer, the fact of the matter is government income support isn't likely to stretch as far as paying off your mortgage. Fortunately, 95,000 Australians each year don't have to stress about meeting their mortgage repayments, as they've thought ahead and taken out life insurance, according to the aforementioned report.

What is life insurance?

There are four main types of life insurance cover, each designed to provide you and your loved ones with financial support if you pass away or are unable to work due to injury or illness. Whether it be in the form of a lump sum or regular payments, this financial support can be crucial to keeping up with all of your living expenses and outgoings, including your mortgage.

What is mortgage protection insurance?

Mortgage protection insurance is specifically designed to protect your ability to pay back your mortgage. If you pass away, lose your job, or are unable to work due to injury or illness, mortgage protection insurance could cover your home loan repayments. Usually this type of insurance would not cover any of your other day-to-day outgoings like utilities, education or medical costs.

Key differences between mortgage protection insurance and life insurance

Mortgage protection and life insurance are two different products. Their key differences include:

1. What the policy covers – mortgage protection insurance generally only covers your home loan repayments, whereas life insurance will cover your and your family’s outgoings including things like medical bills, utilities, groceries, and education expenses.

2. How the benefits are paid – mortgage protection insurance usually provides a regular payment to cover your monthly home loan costs, although it can be paid as a lump sum in case of the policyholder’s death. Life insurance in case of death will always pay out in a lump sum, although other insurance types like income protection are paid at regular intervals to you so you can manage your ongoing expenses.

3. How the premiums are calculated – mortgage protection insurance premiums take into account how much your home loan is worth and what you are repaying on it; life insurance premiums focus more on your health, lifestyle and occupation. Both types of premium are likely to increase each year in line with inflation.

4. When the policy will pay out – both policies will generally pay out when the policyholder passes away. Depending on the type of life insurance, some policies will pay upon the policyholder being diagnosed with a terminal illness. Mortgage protection insurance may also pay out when the policyholder is unable to work.

Do I need life insurance if I have mortgage protection insurance?

This depends on your objectives and financial situation. Mortgage protection insurance benefits can usually only be spent to pay down your home loan. If you have other debts that your dependents would be unable to cover without your income, then it is worth considering how life insurance might provide you with greater financial protection and peace of mind.

How life insurance products can help cover repayments

Life insurance products can help to cover your mortgage repayments in a number of ways. We look in to the main types of cover and their benefits below, but always make sure to check the relevant Product Disclosure Statement (PDS) when purchasing insurance cover.

Life insurance

If you pass away, your life insurance will pay a lump sum to your nominated beneficiaries. There is no specific limitation attached to what this money can be spent on, with many people using it to help pay down debts including a home loan.

Total and permanent disability cover (TPD)

TPD insurance can provide for you if you become permanently disabled and unable to work due to an accident or illness. It can provide you with a lump sum payment to access medical and rehabilitation treatments, and can also go towards paying off your mortgage. That means you and your loved ones will have the help you need to keep the house, and even make modifications if required, while you're recovering and need homely comfort the most.

Income protection

Income protection can kick in as an alternative source of income if you're temporarily unable to work due to an illness or injury that has left you Totally Disabled or Partially Disabled. That might be because you hurt your back while working around the house, you suffered a heart attack, or broke your leg in an accident. A monthly payment for a nominated period of time can help you keep your household up and running, and provide for your loved ones while you recover.

Critical illness (trauma) insurance

Critical Illness (trauma) insurance can come to your aid if you become critically ill or injured and require extensive medical treatment to recover. Like TPD, you may receive a lump sum payment from your critical illness (trauma) insurance policy, which can help give you a leg up when you really need it.

Examples of critical injuries or illnesses include blindness, loss of hearing, heart and neurological conditions, and cancers such as melanomas, breast cancer and malignant tumours. These illnesses are specified and defined in the PDS (Product Disclosure Statement). Importantly, instead of having to work through this period, you can cut right back on your hours, knowing that critical illness (trauma) insurance can also be used to help pay for your mortgage repayments while you're concentrating on your recovery.

Home is where the heart is

The reality is that an unexpected illness or injury usually requires time off work, and if this time off extends beyond your accrued sick leave, you and your family could be left short.

At TAL, we understand that everyone’s circumstances are unique and we all need to recover in different timeframes. Having the right financial support in place means you can concentrate on your recovery and give your family peace of mind for the future. If you would like to assess what type and amount of cover suits you, you can use TAL's Coverbuilder.

Any financial product advice is general in nature only and does not take into account any person’s objectives, financial situation or needs. Before acting on it, the appropriateness of the advice for any person should be considered, having regard to those factors. Persons deciding whether to acquire or continue to hold life insurance issued by TAL should consider the relevant Product Disclosure Statement (PDS). The Target Market Determination (TMD) for the product (where applicable) is also available. Life insurance issued by TAL Life Limited ABN 70 050 109 450 AFSL 237848.