Why is Mortgage Protection Insurance important?

Why is Mortgage Protection Insurance important?

You have a mortgage which is why you're probably asking this question, so the logical leap is you have a mortgage because you either don't have the financial resources not to or you wish to leverage your capital for the maximum return. Either way you have taken on a financial risk by having a mortgage.

If things go to plan and nothing happens to you or your property then the risk has not been realised, the question then becomes what if the risk is realised?

Mortgage Protection Insurance is how you go about mitigating this particular financial risk.

People often look at 'things' implemented to mitigate risk as being a cost. It's important to look at your property purchase from an overall cost of acquisition, not just the purchase price. The numbers might be a little scary when you look at it this way.

You are including the interest costs, building reports, valuations, legal fees, insurance and other contingency costs as the total cost of acquisition. All of a sudden, this is now a number significantly larger than just the purchase price.

Do not give up just yet. When you worked through the purchase of your property, you already mitigated some risks. By having a valuation done and getting a building report you have secured a couple of key physical risk issues, so why stop there?

After you have committed to the property and the mortgage, the question now changes to; what can take this property away from me?

Damage to the property, like a fire, can affect its value. You would insure the house against damage with house insurance, so you can repair or rebuild it. It is important to maintain the value in your property, as this is what the bank is relying on to realise, by way of sale, if you do not make your mortgage payments. This leads into the next thing you need to consider.

  • Non-payment of the mortgage repayments. This can happen due to a number of reasons;
  • You choose not to, probably not a smart idea and not one we can really mitigate.
  • Loss of your job, say redundancy, meaning you do not have money to make your mortgage payment.
  • More seriously you are injured or ill and you cannot work to earn an income.
  • You have an accident or illness that prevents you working at the same level and earning capacity as you do now.
  • You have an illness or accident that prevents you working ever again
  • You develop a terminal illness or pass away.

How do we manage these?

The simplest answer is by putting in place appropriate insurance to reduce or remove the financial burden in the event of a particular situation or event happening. Yes this is called life insurance, but life insurance is not just about dying. We have life cover yes, but we also have critical illness covers, income and mortgage repayment protection as well as permanent disablement which all fall under the umbrella of life insurance.

In the situation of something happening to you and thus something affecting your ability to pay the mortgage, we have a number of solutions to cover all of the points above.

Let’s start with the list of things above;

Loss of job through redundancy, we can insure you for this for a maximum claim of 6 months. This does come with a caveat; you must have the cover in place for 6 months before you are able to claim a benefit. When you apply, you must not be aware of any restructure or layoffs at your place of work. You can get more information on this here.

The first option on the declining curve between good health and no health is mortgage repayment insurance. This pays your mortgage if you are unable to work due to sickness or accident until you either return to work or reach retirement at age 65 or 70.

The next step in severity is a traumatic condition or critical illness cover. This pays at a point where you are diagnosed with a critical illness rather than being dead or disabled. Sometimes claims on this cover, while forcing a change in lifestyle, may not mean you cannot work.

This cover, depending on provider, can also have total permanent disability (TPD) built in. This means you do not have to have separate TPD cover. Again, like Life Cover and TPD we recommend paying off the mortgage if you were to claim, as this cover is more expensive than the next two options, it is not always practical from an affordability point of view.

In my experience, often the approach is to use trauma cover as a financial buffer to get through recovery and use life cover and maybe TPD to clean up the rest of the mortgage if it comes to that.

As we move along the medical severity curve, we come to Total Permanent Disability, or TPD, as its known in the insurance industry. TPD is a cover that pays if you are disabled permanently and never going to return to work. There are two flavours of TPD.

In the situation of own occupation cover, TPD will pay if you cannot return to the job you were in at claim time.

In the situation of any occupation cover, TPD will pay if you are unable to do any job you are suited to through training or experience.

If you are going to have TPD cover, you want the own occupation version. We would use this in a similar way to life cover; to make sure your mortgage went away if you were totally permanently disabled.

The final option is to insure yourself with life cover. You should consider cover for at least the value of the mortgage. This will give you or your estate the money required to clear the mortgage and retain your property if you were to pass away or become terminally ill. In normal circumstances, we recommend more than just the mortgage, as there are funeral and final expenses, credit cards and often short-term debt that need to be taken care of.

I have income protection and the mortgage repayment insurance sounds like income protection?

To a point, you are correct, it is very similar to income protection but it is cover for the mortgage payments. There are advantages to having mortgage protection insurance over normal income protection, the primary one being other income offsets. Where other payments related to your disability could be offset against your income protection benefit.

In recent times, Mortgage Repayment Insurance has changed to look very similar to Income Protection. The major differences are; it is based on your mortgage payment and not your income. You could possibly justify a higher benefit. Mortgage Repayment Insurance does not offset ACC and other Income Protection benefits or payments.

As you can see from this article there are a number of options, some will be relevant to you, some won’t.

If you want to have a closer look at what solutions are suitable for your situation, get in touch or give us a call, we would be happy to help work through the most suitable plan for you.

The information is only intended to be of a general nature and should not be relied upon in any part without obtaining full details of the products and services by contacting Willowgrove Consulting Limited. All product and service details, terms, conditions and other information are subject to change at any time without notice. Terms, conditions and fees apply to the various products and services and are available on request. A disclosure document will be provided to you on request free of charge.

People often look at 'things' implemented to mitigate risk as being a cost. It's important to look at your property purchase from an overall cost of acquisition, not just the purchase price. The numbers might be a little scary when you look at it this way.

You are including the interest costs, building reports, valuations, legal fees, insurance and other contingency costs as the total cost of acquisition. All of a sudden, this is now a number significantly larger than just the purchase price.

Do not give up just yet. When you worked through the purchase of your property, you already mitigated some risks. By having a valuation done and getting a building report you have secured a couple of key physical risk issues, so why stop there?

After you have committed to the property and the mortgage, the question now changes to; what can take this property away from me?

Damage to the property, like a fire, can affect its value. You would insure the house against damage with house insurance, so you can repair or rebuild it. It is important to maintain the value in your property, as this is what the bank is relying on to realise, by way of sale, if you do not make your mortgage payments. This leads into the next thing you need to consider.

  • Non-payment of the mortgage repayments. This can happen due to a number of reasons;
  • You choose not to, probably not a smart idea and not one we can really mitigate.
  • Loss of your job, say redundancy, meaning you do not have money to make your mortgage payment.
  • More seriously you are injured or ill and you cannot work to earn an income.
  • You have an accident or illness that prevents you working at the same level and earning capacity as you do now.
  • You have an illness or accident that prevents you working ever again
  • You develop a terminal illness or pass away.

How do we manage these?

The simplest answer is by putting in place appropriate insurance to reduce or remove the financial burden in the event of a particular situation or event happening. Yes this is called life insurance, but life insurance is not just about dying. We have life cover yes, but we also have critical illness covers, income and mortgage repayment protection as well as permanent disablement which all fall under the umbrella of life insurance.

In the situation of something happening to you and thus something affecting your ability to pay the mortgage, we have a number of solutions to cover all of the points above.

Let’s start with the list of things above;

Loss of job through redundancy, we can insure you for this for a maximum claim of 6 months. This does come with a caveat; you must have the cover in place for 6 months before you are able to claim a benefit. When you apply, you must not be aware of any restructure or layoffs at your place of work. You can get more information on this here.

The first option on the declining curve between good health and no health is mortgage repayment insurance. This pays your mortgage if you are unable to work due to sickness or accident until you either return to work or reach retirement at age 65 or 70.

The next step in severity is a traumatic condition or critical illness cover. This pays at a point where you are diagnosed with a critical illness rather than being dead or disabled. Sometimes claims on this cover, while forcing a change in lifestyle, may not mean you cannot work.

This cover, depending on provider, can also have total permanent disability (TPD) built in. This means you do not have to have separate TPD cover. Again, like Life Cover and TPD we recommend paying off the mortgage if you were to claim, as this cover is more expensive than the next two options, it is not always practical from an affordability point of view.

In my experience, often the approach is to use trauma cover as a financial buffer to get through recovery and use life cover and maybe TPD to clean up the rest of the mortgage if it comes to that.

As we move along the medical severity curve, we come to Total Permanent Disability, or TPD, as its known in the insurance industry. TPD is a cover that pays if you are disabled permanently and never going to return to work. There are two flavours of TPD.

In the situation of own occupation cover, TPD will pay if you cannot return to the job you were in at claim time.

In the situation of any occupation cover, TPD will pay if you are unable to do any job you are suited to through training or experience.

If you are going to have TPD cover, you want the own occupation version. We would use this in a similar way to life cover; to make sure your mortgage went away if you were totally permanently disabled.

The final option is to insure yourself with life cover. You should consider cover for at least the value of the mortgage. This will give you or your estate the money required to clear the mortgage and retain your property if you were to pass away or become terminally ill. In normal circumstances, we recommend more than just the mortgage, as there are funeral and final expenses, credit cards and often short-term debt that need to be taken care of.

I have income protection and the mortgage repayment insurance sounds like income protection?

To a point, you are correct, it is very similar to income protection but it is cover for the mortgage payments. There are advantages to having mortgage protection insurance over normal income protection, the primary one being other income offsets. Where other payments related to your disability could be offset against your income protection benefit.

In recent times, Mortgage Repayment Insurance has changed to look very similar to Income Protection. The major differences are; it is based on your mortgage payment and not your income. You could possibly justify a higher benefit. Mortgage Repayment Insurance does not offset ACC and other Income Protection benefits or payments.

As you can see from this article there are a number of options, some will be relevant to you, some won’t.

If you want to have a closer look at what solutions are suitable for your situation, get in touch or give us a call, we would be happy to help work through the most suitable plan for you.

The information is only intended to be of a general nature and should not be relied upon in any part without obtaining full details of the products and services by contacting Willowgrove Consulting Limited. All product and service details, terms, conditions and other information are subject to change at any time without notice. Terms, conditions and fees apply to the various products and services and are available on request. A disclosure document will be provided to you on request free of charge.

Jon-Paul Hale

Written by : Jon-Paul Hale

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Physical Address:
5i Miro Place
Albany
Auckland

Email: enquiry@willowgrove.co.nz
Phone: 09 973 2849

Postal Address:
PO Box 301792
Albany
Auckland