The ‘what ifs?’ every mortgage borrower needs to ask

By Simon Keir, Westlawn Senior Insurance Specialist
25 September 2017

Purchasing a property, whether it’s to live in or as an investment, is one of the biggest (and likely most daunting) financial commitments most of us are ever likely to make during our lifetimes. This is especially true today when you consider sky high property prices and the fact that you could be locked into paying off your mortgage over the next 25 to 30 years.

Whether you’re taking out a mortgage to purchase your first home, upgrade to a new home or purchase an investment property, taking on such a large debt always involves some level of risk.

What if I have an accident and I’m off work for 3 months?

What if I’m bedridden with an illness for months on end?

What if I have a stroke and can’t return to work?

What if …?

While none of us like to dwell on such ‘what if?’ scenarios, they can and do happen.

Problem is, many Australians aren’t properly planning for them.

Wouldn’t last 3 months off work

Independent research conducted on behalf of ALI Group[1] has found that 48% of Australian mortgage holders worry about being diagnosed with a serious illness at some point in their lives.

And if a critical illness prevented them from working for 3 months or longer, more than half of Australian home loan borrowers (55%) would need to sell their assets (such as the family home or investment property) or rely on the welfare of family and friends.

Only 33% of respondents said they would fall back on an insurance policy.

I’m covered by my super fund, right?

If something happens to me, I’m covered by my super fund, right?

Many super funds do provide members with death and disability insurance. Income protection may also be included or offered as an optional extra.

But will that be enough?

According to statistics cited by Canstar, around 83% of superannuation members sign up for the default insurance cover available through their super fund. Depending on the super fund, the default option may provide basic life and disability cover of perhaps a couple of hundred thousand dollars. However, a $200,000 life insurance policy won’t come close to paying off the average Australian mortgage.

Housing finance data for July 2017 from the Australian Bureau of Statistics (ABS) shows the average Australian mortgage is currently $370,500. For first home buyers, the Australian average drops only slightly to $321,800.

In New South Wales, the average home loan (the highest of any state), is $435,700.

Basic life insurance cover through super, therefore, may not be enough to repay the mortgage for many Australian families.

How much insurance do I need?

The insurance required to protect your family’s financial security (and home) will naturally depend on your individual situation.

Life insurance

The amount of life insurance cover you need should take into account all your outstanding debts, such as paying out your mortgage, credit cards and personal loans. It should also help provide for your family’s regular living expenses and other ongoing costs such as annual school fees.

Disability insurance

If you were to suffer a disability and unable to return to work, not only would you need to pay out your mortgage and other debts, you may also need to cover additional expenses in relation to your disability. These could include ongoing medical or rehabilitation costs and home renovations to improve accessibility.

Income protection

Income protection can provide regular monthly payments of up to 75% of your regular earnings while you’re off work. This can help cover mortgage repayments as in the real life case study below. If you have default income protection through your super, check the details such as the percentage of salary payable each month, what you are covered for, waiting period and maximum benefit period.

Trauma insurance

Also known as critical illness insurance, this cover is not available through super. It pays a lump sum benefit of up to $2 million if you suffer a specified critical illness such as heart attack, stroke, coma, blindness, malignant cancer, MS or any other condition specified in the policy. Trauma insurance can help cover expensive medical bills and ongoing rehabilitation.

Case study

Snowboarding accident leaves plumber off work … but finances not down the drain

Joe is a 35-year-old self-employed plumber. He is single with no dependants. Having worked hard over the years, Joe has acquired two investment properties. He makes fortnightly loan repayments on each property.

While on a holiday to the snow, Joe had an accident while snowboarding, leaving him with a torn ligament in his knee. Joe needed a full knee reconstruction and ended up being off work for almost 9 months.

Fortunately for Joe, he had peace of mind knowing his Income Protection policy would pay him a monthly benefit of $5,300 per month from the day of his accident. This monthly Income Protection payment enabled Joe to meet his ongoing mortgage commitments on his investment properties as well as covering his general living expenses whilst on claim.

Joe could therefore concentrate on his rehabilitation and not stress about his finances or having to consider the immediate sale of his investment properties.

Advice on protecting your family’s financial security

Alarmingly, the ALI Group research found that 64% of respondents had never consulted a financial adviser.

Seeking advice in relation to your personal insurance needs can help ensure you have the right amount of cover in place. Suffering a disability, critical illness or the death of a loved one is highly stressful for the whole family. The last thing you or your loved ones need to worry about is whether the family will be financially secure in their own home.

For your family’s peace of mind, make an appointment to discuss your insurance needs with Simon Keir today:

Copyright © 2017

[1] 1 in 2 Aussies would sell assets or rely on family to pay mortgage, if unable to work https://www.aligroup.com.au/news/blog/2017/1-in-2-aussies-would-sell-assets-or-rely-on-family-to-pay-mortgage-if-unable-to-work

General Advice Warning
The information provided is intended to provide general information only and the information has been prepared without taking into account any particular person’s objectives, financial situation or needs. Before acting on such information, you should consider the appropriateness of the information having regard to your personal objectives, financial situation or needs. In particular, you should obtain professional advice before acting on the information contained herein and review the relevant Product Disclosure Statement (PDS).

Westlawn Life Insurance Pty Ltd ABN 91 164 146 285 is a Corporate Authorised Representative (No. 444800) of ClearView Financial Advice Pty Limited ABN 89 133 593 012 AFS Licence No. 331367 GPO Box 4232, Sydney NSW 2001.