Buying a home is exciting. Thinking about what happens if you can’t pay the mortgage is less fun – but important. Mortgage protection insurance provides financial security if illness, injury, or death affects your ability to pay.
Types of Protection
Life Insurance
Pays out a lump sum if you die during the policy term. Typically used to clear the mortgage so your family keeps the home.
Critical Illness Cover
Pays a lump sum if you’re diagnosed with a specified serious illness (cancer, heart attack, stroke, etc.). Can clear the mortgage or fund reduced working.
Income Protection
Replaces income if you can’t work due to illness or injury. Pays monthly until you recover, reach retirement, or the policy ends.
Do You Need It?
Life Insurance
If someone depends on your income – partner, children – life insurance is essential. Without it, your death could mean they lose the home.
Single with no dependents? Life insurance is less critical (though may still be sensible for other reasons).
Joint mortgages should consider both lives. The death of either partner affects ability to pay.
Critical Illness
More discretionary than life cover. Consider:
- Could you maintain payments during serious illness?
- Would you want to clear the mortgage if seriously ill?
- Is the cost worthwhile for your circumstances?
Critical illness cover is expensive. Not everyone concludes it’s necessary.
Income Protection
Often undervalued. Consider what happens if you can’t work for months or years:
- How long would savings last?
- Would you receive sick pay? For how long?
- Could you cover the mortgage on reduced income?
Income protection provides ongoing support rather than one-off lump sums. It’s arguably more useful than critical illness for most people.
How Much Cover?
Life Insurance
At minimum, enough to clear the mortgage. Consider adding extra to cover:
- Other debts
- Living expenses for a period
- Childcare costs
- Future costs (education, etc.)
Critical Illness
Enough to clear the mortgage, or enough to provide financial flexibility during recovery. Doesn’t have to match the mortgage exactly.
Income Protection
Typically covers 50-70% of income. Insurers won’t cover 100% (they don’t want claims to be financially attractive).
Types of Life Insurance
Level Term
Fixed payout throughout the term. Simple and consistent.
Decreasing Term
Payout reduces over time, roughly matching a repaying mortgage balance. Cheaper than level term.
Family Income Benefit
Pays monthly income rather than lump sum if you die. Can be more practical for family needs.
What Affects Cost?
- Age (younger = cheaper)
- Smoker status (smokers pay significantly more)
- Health history
- Occupation
- Amount and length of cover
Premiums are typically fixed for the policy term. Locking in rates while young and healthy saves money long-term.
Lender Requirements
Mortgage lenders don’t legally require life insurance – but many insist on buildings insurance. Life cover is your choice, though arguably more important.
Some lenders sell insurance alongside mortgages. You’re not obliged to buy from them and can often find better deals elsewhere.
Claims
Insurance is only useful if it pays out. Check:
- Exactly what’s covered (policy definitions vary)
- What evidence is required for claims
- How long before income protection pays
- Whether pre-existing conditions are excluded
Read policy documents. Understand what you’re buying.
Talk to Us
SJ Financial Solutions provides protection advice alongside mortgage services. Contact us to discuss your protection needs.
