Do I need mortgage protection insurance + what does it cost?

• What is mortgage protection insurance?

• Mortgage protection insurance fine print

• How much does mortgage protection insurance cost?

• Do I need mortgage protection insurance?

• Other insurance policies to consider

If you die, get sick or injured and are unable to work, mortgage protection insurance provides set monthly payments to help you and/or your family cover mortgage or rent payments and other expenses. In exchange you pay a set monthly premium. 

This is a relatively low cost way to help ensure that you don’t lose your home or experience mortgage stress if you can’t work. Mortgage protection insurance is often purchased together with life insurance. 

Before you take out any insurance it’s always a good idea to read the policy document and make sure you fully understand the terms and conditions. Here are a few things to look out for when it comes to mortgage protection insurance:

• Your level of cover is usually calculated as either a percentage of income (up to 115%), or a percentage of your contractual rent or mortgage payment (usually max 45% but some insurers cover 75%). You decide your level of cover within your insurer’s limits. 

• Your wait period is the amount of time you need to wait after becoming ill or injured before you receive monthly claim payments. 

• Your payment period is the amount of time your payments will continue. Your payments will stop at the end of your payment period or when you’re able to return to work, whichever is sooner. 

• Exclusions are events, injuries or circumstances that your policy will not cover. These vary by policy and insurer, but they may include suicide within the first 12 months of taking out a policy, pre-existing health conditions, voluntary job loss, certain high risk activities, pregnancy complications, and anything arising from non-compliance with medical treatment. 

• Waiver of premium: some insurers don’t require you to pay your premiums if you’ve made a claim and are receiving payments. 

• Help returning to work and cover for TPD or partial disablement: different policies and insurers provide different levels of cover for certain incidents and costs under mortgage protection insurance. For example some will provide cover for help returning to work, or provide extra cover for total and permanent disablement. 

To give you a rough idea of what to expect, I used my age, gender, employment (33, male, employed, writer), NZ’s average mortgage ($588,558), and NZ’s median salary ($69,804) to generate a few quotes from Life Direct. 

This is a tricky question because the answer depends entirely on your circumstances. Here are a few things to consider:

• Your emergency fund: if you’ve got a generous amount saved in case of emergencies this may reduce your need for mortgage protection insurance (or at least reduce the amount of cover you need). Think about how long you could cover your expenses if your income were to suddenly stop coming in.

• Your sick leave: if you’ve worked at your job for a long time you may have a generous sick leave entitlement. This may reduce your need for mortgage protection insurance. 

• Other support available: it’s worth considering other financial support you may receive if you were to be unable to work. For example, if your partner or spouse could work more, if your family could help support you, or if you could receive sickness benefits from WINZ. 

• Alternative arrangements: if you’ve got spare rooms, or a granny flat that you’re comfortable renting out if something were to happen, this could help cover costs.

• ACC: there’s a bit of a double up when it comes to covering loss of income via injury. ACC covers up to 80% of your income due to injury after a 10 day stand down period, so if you’re more worried about injury rather than illness - this is something to think about. 

• Other insurance policies: there are several policies that may overlap with mortgage protection insurance in some way. For example, if you have income protection insurance, it may be able to help with your mortgage repayments if something happens. Health insurance, life insurance, total and permanent disability insurance, and other types of cover may also provide benefits that could help pay your mortgage. 

Important: banks will try to sell you income protection, life insurance and/or mortgage protection insurance when you get a mortgage with them. But you do not need these types of insurance to get a mortgage, and banks rarely offer the best value cover. Do not go with your bank by default because it’s easy - it’s always best to shop around to find the best deal. 

Level of cover

Mortgage protection insurance covers up to 45% of income or 115% of your mortgage, while income protection insurance covers up to 75% of your income. 

ACC

Mortgage protection can be claimed on top of ACC income protection cannot. 

Level of income

With mortgage protection this is agreed when you buy a policy, with income protection you may have to prove your income when you make a claim. 

Tax

The cost of mortgage protection insurance isn’t tax deductible, and payments aren’t taxed. However the cost of income protection insurance is tax deductible, and your payments may be taxed. 

Combining both policies?

Depending on your circumstances, it may be worth considering combining both policies and adjusting your level of cover to suit. This may be an especially good idea if you have high daily living costs, or dependants.