Buying a home is one of the biggest financial decisions you will ever make so it’s important to have cover in place to protect this purchase.
While lenders won’t demand you have life insurance to get a home loan, it can be a crucial part of your financial planning and security for the future when taking on such a large debt.
It can be tricky to know how much – and what – insurance you require when you buy a property. You may not know what type you need or the difference between home loan protection insurance, income protection and life insurance.
A good starting point is to ask yourself a few questions:
- What if my partner/spouse died or was unable to work?
- What if I suddenly couldn’t work?
- What if our savings run out and we can’t pay the home loan?
These scenarios are important to think about because if you’re unable to cover home loan repayments without a regular wage there’s a risk you could lose your home.
The financial impact of death on families
ANZ’s research report, The Impact of Death on Parents and Children, found 40 per cent of the families surveyed had no warning prior to the death of their parent/spouse, and 64 per cent had less than a week’s notice of their parent/spouse dyingdisclaimer. This highlights the importance of having insurance cover in place ahead of time should the worst happen.
The research also found families with life insurance were impacted less financially following a death. Before the death of the parent/spouse, 14 per cent of families without insurance rated themselves as ‘struggling’ when it came to finances. After the death occurred, the same group’s answer of ‘struggling’ jumped to 47 per cent. For those with insurance, 44 per cent rated their finances as ‘adequate’ and this figure rose to 56 per cent following the death of one parent/spousedisclaimer.
The research found that in hindsight, 75 per cent of those without life insurance agreed that a policy covering death would have helped their situation.
High levels of household debt a concern
Australia has one of the highest personal debt levels in the world. According to the Reserve Bank of Australia, in the fourth quarter of 2018 household debt as a percentage of household income rose to a new high of almost 200 per cent with much of the debt being home loans. That’s nearly double the amount of money that households owed per year compared to what they’re bringing in. This is a big gap to cover if earning capacity suddenly changes and households don’t have insurance in place to cover home loan repayments.
In addition to high levels of personal debt, the Australian Bureau of Statistics says the national average home loan size is $384,700 and a weakening economy could present a danger to home loan holders, especially if unemployment rises. So it makes sense to have protection in place for a number of reasons. But what is the most appropriate insurance to have?
Life insurance, income protection and home loan protection explained
ANZ Mobile Home Loan Lending regional manager Simone Geronimi says many borrowers believe they already have the correct insurance through their super.
“Many people believe they automatically have income protection cover in their super but this is not necessarily the case. Often what they have is just life insurance,” she says. “They are not protecting their ability to earn an income. I don’t think there is enough public awareness out there about the different types of insurances and what they are or aren’t covered for in the event they could no longer work.”
Life insurance pays out a lump sum in the event of death or permanent disability, or in some cases if you are diagnosed with a terminal illness and have a limited life expectancy. But what if you are sick or injured and cannot work? How will you meet your home loan repayments and other expenses? This is where income protection can help.
Geronimi says income protection insurance is based on your income and aims to cover your costs of living if you are injured or ill and cannot work for a while. “You pay an ongoing premium and if you are unable to work due to a claimable event then you receive a monthly payment that you can use towards your living expenses, including your home loan repayments.”
Another type of insurance is home loan protection (or home loan repayment insurance), which protects borrowers from the risk of defaulting on their home loan. Payments under this insurance are used exclusively for home loan repayments – not for any other expenses –in the events such as death, injury, illness or involuntary unemployment.