Income protection vs. mortgage insurance: What you need to know

Both income protection insurance and mortgage protection insurance are income replacement products with different types of coverage. The most significant difference is that you can only use mortgage protection to cover your mortgage repayments if you’re unable to earn an income.

On the other hand, you can use income protection insurance to cover your living expenses for the benefit period or the period you’re receiving the payment. These expenses can include your mortgage repayments, depending on the plan you are on.

What is the benefit of taking out income protection insurance?

People often underestimate the risk of not being able to work due to an illness or disability. According to a survey by global insurer Zurich, twenty-nine per cent of Australia’s working population would survive less than a month without their income. Sixty-five per cent believe their savings would not last more than six months if they stopped earning. 

Having income protection insurance provides you with an alternative income source when you cannot work due to unforeseen circumstances. However, the survey also found Australians to be the least willing to spend on insurance protection. This lack of interest is despite the fact cover is often available for less than five per cent of their earnings, depending on factors like age and the extent of cover required.

When it comes to the benefits, an income protection policy pays up to seventy-five per cent of your pre-tax income during the benefit period. You can use this amount to meet your daily expenses and pay your bills in the absence of any earnings due to an accident or sickness.

For instance, if you get COVID-19 and have to take time off work to receive treatment. If you don’t have sick leave or enough sick leave, you can make a claim on your income protection policy to pay for your living expenses for that period.

Who needs income protection insurance?

Most people can benefit from having an income protection cover in place. But it’s even more important if:

• You have a home loan or other debts that you need to repay, even if you’re working or not.
• You’re the sole income earner in the family and have dependents who rely on the income you earn.
• You don’t get any sick days or annual leave from your employer because you’re self-employed, work as a freelancer or work casually. 

Income protection insurance vs. mortgage protection insurance

Mortgage protection insurance cover helps you repay your mortgage if you suddenly lose your job due to an illness or injury. It also covers your mortgage repayments if you die so that your family home is protected even after you’ve passed. 

The fundamental difference between income protection insurance and mortgage protection insurance is that mortgage protection only covers your mortgage repayments. Whilst income protection also takes care of your other bills like school fees, credit card payments, etc.

The other big difference is that you may compare income protection insurance plans from various insurers before choosing the right cover for yourself. However, with mortgage protection insurance, you’ll likely take this out with your home loan provider. 

Taking out mortgage protection insurance is not a mandatory requirement for many home loans. It’s often good to have, just in case, if you don’t have any other insurance policy with similar benefits. However, if you’ve already got income protection, it’s worth looking at that policy before taking out a separate mortgage protection policy. Specifically, you should check if your current plan already covers your mortgage repayments. 

Should I choose income protection or mortgage protection?

If you’re a homeowner or planning to buy a property soon, you may be looking into the life insurance products available to protect your income and assets, especially your home. Some of the popular options are term-life insurance, disability insurance and income protection insurance. You may even consider mortgage protection insurance from your lender that explicitly covers your home loan repayments in the case of an unforeseen event like illness or death.

There’s no clear answer to whether income protection or mortgage protection is a better option. Your choice will depend on your personal circumstances, and no two situations are the same. However, if you’re looking to compare income protection, life insurance and mortgage protection covers. In that case, you’ll find that income protection typically provides better risk protection against financial hardships, including mortgage protection. Consequently, income protection is often the preferred choice for individuals who have other expenses besides a mortgage. 

If you’ve decided to go with income protection insurance, it helps to compare deals from various insurers to get the best possible price and policy. You could also seek help from an insurance broker to pick a policy that caters to your financial circumstances and goals.

The following tips can also help you to make an informed choice:

• Ensure that your insurance provides you with an adequate cover that pays your loan repayments in case of unemployment while offering additional financial support.
• Your policy benefit period generally starts after a waiting period of up to 120 days. If you’re rendered unemployed during this period, you’re ineligible to make any claim on your policy. If you wish to minimise this risk, you may consider a policy with a shorter waiting period, but it might cost you more.
• The benefit period for income protection is variable. It can be a set period of, for instance, two years, or you can choose to set it with an end age, like 70-years old. Not all insurers offer both options.
• If you’re confused between stepped and level premiums, the latter might turn out to be more cost-effective if you plan to hold on to the policy in the long run. Stepped premiums typically start cheaper but rise as you get older. On the other hand, level premiums might seem expensive at the outset but, the amount you pay tends to remain the same throughout the policy period. 

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