Understanding Mortgage Protection Insurance Terms
Owning a home is a significant milestone, but it also comes with the responsibility of managing your mortgage payments. Mortgage protection insurance is designed to safeguard your home by ensuring that your mortgage payments can continue if you encounter financial difficulties due to illness or injury. In this guide, we'll break down the key terms of Mortgage Protection Insurance to help you understand how it works and how it can protect your home.
1. Mortgage Protection Insurance
Mortgage protection insurance is a policy that covers your mortgage payments if you’re unable to make them due to unforeseen circumstances, such as illness or injury. This insurance ensures that your mortgage is paid, protecting your home from foreclosure and providing peace of mind to you and your family.
2. Benefit Amount
The benefit amount based on either your mortgage repayments or a portion of your income that the insurance company will pay you if you can't work. This can range from 115% of your mortgage repayments or 45% of your pre-disability income.
3. Wait Period
The wait period is the amount of time you must wait after becoming unable to work before your mortgage protection insurance benefits begin. The most common wait period we see is 4 weeks (30 days) but can go up to 52 weeks and more. Choosing a longer waiting period usually results in lower premiums, but you'll need to have sufficient savings to cover expenses during this time.
4. Payment Period
The payment or benefit period is the length of time your mortgage protection insurance policy will pay out if you can't work. Benefit periods can range from a few years to up to retirement age of 65. A longer benefit period provides more extended protection but may come with higher premiums.
5. Occupation Class
Occupation class refers to the categorization of your job based on the risk associated with it. Insurers in New Zealand classify occupations into different classes, with higher-risk jobs often attracting higher premiums. For example, a desk job might fall into a lower-risk category, while a construction job would be higher risk.
6. Total Disability
Total disability means that you're unable to work in your usual occupation due to illness or injury. Different policies have varying definitions of total disability, so it's crucial to understand how your insurer defines this term. Some policies may require that you're unable to work in any occupation, not just your usual one.
7. Partial Disability
Partial disability means you're unable to work full-time due to illness or injury but can still perform some duties or work part-time. Mortgage protection insurance policies often include partial disability benefits, which provide a reduced benefit amount proportional to the reduction in your working capacity.
8. Stepped vs. Level Premiums
Stepped Premiums: Stepped premiums start lower and increase each year as you age. They can be more affordable initially but become more expensive over time.
Level Premiums: Level premiums remain constant throughout the life of the policy, which can make them more cost-effective in the long term, especially if you plan to keep the policy for many years.
10. Exclusions
Exclusions are specific situations or conditions where the insurance company will not pay out benefits. Common exclusions in mortgage protection insurance policies might include pre-existing medical conditions, self-inflicted injuries, or disabilities caused by high-risk activities.
11. Offset Clause
An offset clause is a provision in some income insurance policies that allows the insurer to reduce your benefit amount if you receive income from other sources, such as social security benefits, sick leave, or other insurance policies. Unlike income insurance, mortgage protection insurance is not offset by ACC. It's important to understand how this might affect your total income in the event of a claim.
Conclusion
Mortgage protection insurance is a vital component of your financial safety net, offering protection if you're unable to work due to illness or injury. By understanding these key terms, you can better evaluate your options, choose the right policy, and ensure that you and your family are financially secure, even in challenging times.
Nimalka Perera
Business Development Manager
New Vision Financial Services
Plan your future and let us help you have peace of mind along the way.
