Mortgage protection insurance is a scam. There – we said it.
What is it?
Ok – let’s back track a little bit. Mortgage protection insurance is a form of insurance that mortgage providers offer to help reduce financial hardship and emotional distress from unforeseen terminal or health crisis. Sounds like a great idea doesn’t it?
The problem is that regular life insurance does the exact same thing at 1/3rd of the price. This means that anyone who has mortgage protection insurance can get better coverage at 1/3rd of the price. The reason it is a scam is that some of the bigger providers of mortgage protection insurance (ANZ, NAB etc.) also offer life insurance products but won’t tell you about it when you get a mortgage as they like putting you in a more expensive product.
What is the difference between mortgage protection insurance and life insurance?
While mortgage protection insurance is arguably a bit easier to get, it offers far less features than life insurance but is often three times the price:
Features - Life Insurance vs Mortgage Protection Insurance
|Features||Life insurance||Mortgage protection insurance|
|Flexibility||Various add-on features||Standard built in offers|
|Cover||Cover is selectable||Cover for the balance of mortgage|
|Payout||Payout as settled||Decrease overtime due to the mortgage balance|
|Exclusions||None||Excludes pre-existing medical conditions|
|Channels to buy||Insurance companies or financial planners||Banks or Lenders|
|Benefits||Can cover other expenses||Direct source for mortgage|
|Funeral benefit||Cover immediate cost||No cover|
To understand the price differential take the case of Sarah – she is about to take out a $500,000 home loan, is 40 years old and thinking about buying mortgage protection insurance to ensure her family isn’t left in a bind if she is injured or worse. Instead of just diving head first into the policy she decides to go see a financial adviser to discuss what her other insurance options are. This is likely to be the outcome:
Pricing - Mortgage Protection Insurance vs Life Insurance
|Event||Mortgage protection insurance||Life Insurance|
|Death||$500,000 lump sump payout||$500,000 lump sum payout|
|Work Injury||$5,000 per month||$5,000 per month|
As we have said in a previous article, if you are ever thinking of taking out insurance the best place to go is a financial adviser. You are going to get far superior coverage at a much lower cost than going directly to the insurer or through your mortgage provider.