Mortgage Protection Insurance – a Big Fat Scam
March 24, 2016 .

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

FeaturesLife insuranceMortgage protection insurance
FlexibilityVarious add-on featuresStandard built in offers
CoverCover is selectableCover for the balance of mortgage
PayoutPayout as settledDecrease overtime due to the mortgage balance
UnderwritingRequiredNot required
ExclusionsNoneExcludes pre-existing medical conditions
Channels to buyInsurance companies or financial plannersBanks or Lenders
BeneficiariesLoved onesLenders
BenefitsCan cover other expensesDirect source for mortgage
Funeral benefitCover immediate costNo cover

Note that the above contains the typical features, however the actual features will vary from product to product.

The price

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

EventMortgage protection insuranceLife Insurance
Cost (monthly)$275$90
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.

The problem is getting good advice can be difficult and expensive – that’s why we created Plenty; at Plenty you get comprehensive financial roadmap for free that covers every aspect of your financial life – including personalised life insurance advice.

The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information

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