Income Protection Insurance vs Mortgage Protection

People are taking on a great deal of debt – which can put them in a precarious position. What if something happened to you and you were unable to meet your financial responsibilities?

Some people may choose to take out income protection to cover their expenses if they find themselves unable to work, while others choose mortgage protection.

What is income protection?

Income protection insurance covers your costs of living if you experience serious illness or injury that prevents you from being able to work.

So how does it work? Put simply, you pay an ongoing premium based on your income and preferences. If you’re unable to work due to illness or injury you’ll be entitled to a payment that can be used to pay your bills, mortgage repayments and other costs including education and rehabilitation.

If you compare income protection policies you’ll find a number of options. These generally include:

• Choosing a level of cover. The different levels available can meet up to 70% of your income.
• Selecting a waiting period. Waiting periods usually range from 14–120 days with a shorter waiting period generally being a bit more expensive.
• Having the freedom to select your own benefit period. Benefit periods, meaning the amount of time you would be entitled to claim if you weren’t able to work, range from a 2-year benefit to an ‘age 70’ benefit.
• Choosing between ‘standard’ and ‘plus’ contracts. While standard contracts have fewer bells and whistles, they can still provide the protection required.
• Deciding between a ‘stepped’ or ‘level’ premium. Stepped policies would usually start out cheaper in the beginning but the premiums rise as you get older. Level premiums don’t increase with age so they may seem more expensive in the beginning but in the long term can be more cost effective particularly if holding onto a policy for the long term.

It’s important to note the difference between the type of income protection fund described above and an ‘industry’ or ‘salary continuation’ fund that you may have been offered through your employer superannuation. While the income protection described here offers thorough cover, ‘salary continuation’ plans can be very basic.

What is mortgage protection?

It’s common to confuse income protection and mortgage protection insurance but they are actually quite different. Mortgage protection insurance is a benefit that exclusively covers mortgage repayments. It cannot be used for groceries, bills or expenses.

Unlike income protection insurance, you generally take out mortgage protection insurance with the lender who provides your home loan. It is usually paid in either a lump sum payment or ongoing payments.

Income protection versus mortgage protection

It’s important to consider your individual circumstances – no two situations are the same. This said, income protection is typically able to provide a greater level of financial security than mortgage protection.

It’s highly likely that you have a number of important expenses outside of your mortgage that you’d like to maintain if you were unable to work. The flexibility with income protection to use your benefit to cover a wide range of expenses is a definite bonus.