Mortgage insurance | Bolster Risk Management - Simplifying financial risk, insurance and investments for you.

9 Things You Should Know: Mortgage Repayment Cover

Dom Bish — Sun, 17 Oct 2021 03:17:15 +0000

https://bolsterriskmanagement.com/

Mortgage protection: What is it? Why should you have it?

You have a mortgage; finances are tight because you have stretched yourself so much just to get a foot on the housing ladder. Then you get sick and cannot work for the next 2 years. What happens to your mortgage? Is your new home now at risk of being taken away?

You are renting; You’ve tried the property ladder, but right now it is out of reach. Your family relies on your income to keep paying the rent. Then you have an accident and cannot work for the next 5 years while you rehabilitate. What happens to your family’s home? Is it now at risk of being taken away?

These two examples are basic, but they help to illustrate the majority of reasons why people get this type of personal insurance. Below is a list of nine things you should know before you talk with your financial adviser.

The purpose of disability products
Home mortgage – not investment
“I don’t have a mortgage” (then, use your income)
“Offsets’’ not applied
4 core cost components
Add-ons and additional benefits
Premium type: YRT / Level
Partial Payment Benefits
Common Claims

1. The purpose of disability products

Mortgage protection insurance, is in a suite of products that you might hear referred to as income replacement, or disability insurance products. They will pay the benefit to the effected person on a monthly basis, until that person goes back to work, or the benefit period ends.

Generally, it is “Agreed Value”. This means that the amount insured, also known as the ‘benefit amount’, is agreed at the time of application. There are other income protection products that will determine the benefit amount at claim time.

If you are unable to work due to injury or illness, the benefit will start paying you, after the “waiting period”.

Typically, people may have a mix of both mortgage repayment insurance and income protection. This is because both works slightly differently, although they compliment each other very well.

2. Home mortgage – not investment

You can insure up to 115% of home mortgage repayments. Why 115%? Interest rates can fluctuate – so this amount gives you a buffer. Not all insurers will go to 115%, but most will do 110%-115%. However, they will require proof, like a bank statement.

The insurance can only be on your home mortgage, not on your investment property. Your tenants will continue to pay you rent, even if you have the accident. Therefore, with this product, you are not protecting that financial risk.

3. “I don’t have a mortgage” (then, use up to 45% of income)

Many providers will allow you to use 40-45% of your gross income, instead. Not everyone has a mortgage. This means that you can use the benefit, should you need to, towards paying your rent. You will need to provide the insurer proof of your income.

Check out our podcasts.

There are over 40 to listen to, and most are less than 10 minutes.

4. “Offsets’’ not applied

Unlike many income protection products, mortgage repayment benefits will not be ‘offset’ by other income sources. This means that you can still receive your mortgage repayment insurance (MRI) and the other income.

In New Zealand, many people think of ACC is this context. If you have an injury, you may get some ACC assistance, and, the benefit paid by your insurer.

This type of cover is not normally classed as taxable income. Again, unlike many income protection products, which are taxed as income, typically, MRI isn’t.

5. 4 core cost components

As with the other products in the income replacement suite, there are four main points of price:

The amount you are insuring
The waiting period – the longer the wait, the cheaper the premium
The benefit term – the shorter the benefit is paid, the cheaper the premium
Occupation Class

The waiting periods from most providers are 4 weeks, 8, 13, 26 and 52 weeks. For example, you might choose a longer waiting period if you have some income protection already in place. It depends on the risk protection strategy that you are working on with your financial adviser.

The benefit periods are typically 2 years, 5 years and through to age 65. Some insurance companies will go beyond age 65, which is becoming more relevant as people are working longer than the historical retirement age.

The type of occupation that you do will also determine the price. Some jobs are just riskier than others. Unfortunately, some roles are not covered at all. Each provider has their own definitions and criteria.

6. Add-ons and additional benefits

Another seven articles could be written on this point alone! There is a lot of variety among the insurance providers in the add-ons and ‘extras’ that they offer. They all try to find their own niche in the market, and this is one area that they can deviate from the competition.

Effectively, the insurance firms offer product enhancements, of which some are built-in, the others are optional (paid) extras.

You might come across things like:

Funeral (or bereavement) benefit
Permanent disability benefit
Recurrent disablement
Rehabilitation and support
Childcare support benefit
Mental health discounts
Inflation protection

The range is wide and list is long.

7. Premium type: YRT / Level

As with many personal insurance products, you can elect two ways to pay.

The first is yearly renewable term (YRT). This is effectively saying that your contract is yearly, with the price re-setting each year. It will increase, because you get older, there will be inflation, and the cost of the product will change.

The second option is ‘levelled’ premiums. Here the contract is over ten or more years and you pay the same amount each year. However, yes, you have price certainty but the premium in the early years is higher than you would pay on YRT. The upside though can be significant. As you progress through your contract, the amount you pay will seem less and less compared to the YRT premium. In many cases you could potentially save thousands of dollars over the life of the policy.

Level vs YRT = price certainty & high long-term savings vs lower initial cost and a potentially costly product over time.

8. Partial Payment Benefits

Many insurers will offer partial payment benefits. This might be for a specific injury or a listed critical illness. It does depend on the provider, and you will need to be aware of the fine print.

Often these benefits will be paid in addition to the monthly-paying benefit that you receive.

For example, a fractured wrist may not mean that you need two years off work, but it will cause you some financial difficulties if you are a tradie or a surgeon. The specific injury benefit might be handy here.

9. Common Claims

The different companies have slightly varying statistics on their claims. However, for the disability products like mortgage and income protection, the top claims are as follows:

Muscular and joints (including back issues and accidents)
Cancer
Mental illness/ workplace stress
Neurological conditions and stroke

Asteron Life, who is one of the major providers has it illustrated as this

While it may appear that mortgage repayment insurance is a minefield with different options, much of what I’ve discussed is quite straight forward. In saying that, choosing a financial adviser to walk you through the product is a smart move. Let the professional help you navigate the right options that suit you and your situation.

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What Is The Best Age To Get Life Insurance?

Dom Bish — Tue, 28 Jul 2020 18:08:21 +0000

https://bolsterriskmanagement.com/

The younger the better. Simple answer. You don’t need to read anything else.

Ok, so you’re still reading. Life insurance is all about managing risk. What is risk? Roll a dice. You have 1 in 6 chances of getting a 6, or you have 16.6% chance of getting a 6. You have a 20% chance of getting cancer because you live on planet Earth. That means, if you are in a room with 10 people, you know statistically that two of you will get cancer. You just don’t know which 2. That is the risk. More importantly, you don’t know when two of you will get cancer. Don’t make the assumption that only old people get cancer (to continue using this example), Starship hospital in Auckland is full of children who are battling cancer.

KEY TAKEAWAYS

If others depend on your income then you need life insurance
If you have debt – then you need life insurance.
The sooner you purchase life insurance, the better – pre-existing conditions
The sooner you purchase life insurance, the cheaper the cost

Many of you reading this will have a job. Many of us contribute to a household in some way and are responsible for someone else. The money you earn goes to pay for rent, mortgage, food, clothing, cars, school trips, Spotify, Sky Sports, after-school activities, grandma’s groceries, paying off the credit card… Yup, we earn money and the money goes away.

What would happen if you died? That income would stop. That is why you have life insurance. It providers a lump sum to the people you care about. Even if that is only equivalent to a few years of your income, they are a few years where your family can grieve and learn to live and support themselves without you being around.

If you have debt

This is an easy one. Do you want your debt to become your family’s burden just because you went and got yourself killed falling off a ladder? That 10-year-old BMW you like so much, that you’re paying $500 a month for, might be ok while you’re working. But once you’re dead and the income stops, can your family support that?

What about the mortgage? Let’s say your repayments are $2200 a month. If that debt has been paid off by a life insurance policy, your family don’t need to find an extra $2200 to survive. Suddenly their lives (financially at least) may be a little easier because you took out a policy.

Pre-existing health conditions?

The longer you live, the higher the chance of something going wrong with you (remember the dice at the start?) If you get life insurance while you are fit and young, any new conditions will be covered (as long as you stay with the same insurer).

The cost goes up the older you get

Death and taxes, the 2 certainties in life. Insurance premiums rising is another. However, it is possible to fix your premium in the same way you might fix your mortgage payments. There are some fish-hooks to be mindful of, and not all policies are the same. But if you start when you are young, you can save thousands of dollars on your premiums. Yes, thousands! For example, a 30-year-old male non-smoker could save over $14,000 on a $200,000 policy by the time he is 65. That type of saving is worth a look.

The correct time to get life insurance will change from person to person, depending on the circumstances. Basically, you need life insurance if other people depend on your income, or if you have debt that will carry on after your death. After all, you don’t want to leave them without money to live on… or up the creek because of your car loan.

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I don’t have a mortgage so I don’t need life insurance – right..?

Dom Bish — Wed, 29 Apr 2020 20:43:22 +0000

https://bolsterriskmanagement.com/

“I don’t have a mortgage so I don’t need life insurance – right..?”

The above is a sweeping face-value statement which, on the surface, may seem justified.. However… Is life insurance only to cover your debts if you kark it and end up on the pile of the no-tomorrows..?

Maybe, but maybe not. As with all things personal insurance, there are many factors, which effect people individually Here are a few reasons why

While life (death) is the insurance that most people think of first, it is by no means the only type of cover to consider. From here we can progress on two streams of thought; (a) what is the purpose of life insurance if you die? and (b) what are the financial risks to you should something happen that effects your ability to earn an income? These are not necessarily mutually exclusive questions – if you die, you income-earning ability stops!

There are a heap of other questions that feed from either stream, some overlapping, some taking us in seemingly random tangents. A good adviser will try to uncover as much as possible, asking many questions and painting many scenarios along the way. All in the hope of understanding what your key financial risks are so that an informed, logical and strategic recommendation can be made to their client.

2 examples – no mortgage – both have insurance

I have two examples below which may give pause for thought, neither case has a mortgage, yet both are exposed to financial risks.

Young, male, no mortgage, pays rent, good job – Mac (Auckland)

Let’s meet Mac (not his real name obviously), living in Auckland, renting with some friends in town. Mac has a good job and is moving along his career path in engineering. In his mid-twenties, he is not quite ready to buy a home yet his parents think that he should. He has a small amount of debt (less than $20,000) which he is paying off quite quickly.

Mac’s main concern is that something happens and he is not able to work anymore or earn an income. The last thing he wants is to be a burden on his parents, who are approaching retirement themselves.

If Mac dies:

Mac doesn’t have anyone that he would wish to bequeath money to. However, he wants his funeral paid for (and for his body to be repatriated back to Singapore). Mac also wants his debt repaid in full. The sum total of Mac’s life insurance would be less than $50,000.

If Mac is unable to work for 12 months due to illness:

Mac wants to still be able to live in his current accommodation. To do that though, he needs his rent and expenses covered. A monthly paying disability insurance product similar to income protection (or one of the variations) would help here.

If Mac is never able to work again, due to permanent disability:

Mac would still wish to purchase a property, even if it was a small unit or apartment. Having a lump-sum TPD (total and permanent disability) insurance to cover this expense would give him some independence, even though he would never work again in his occupation.

Single mum paying rent single household earner – Maggie (Napier)

Maggie’s turn to say hi. She has recently left her troubled and violent marriage with 3 kids in tow. One child has mild autism another has ADHD. Qualified and working full time, Maggie is keen to put her past behind her and move on with her life. She has been left with virtually nothing financially and so is on a fairly tight budget. That being said, she works in the health department and knows all to well how one’s health can suddenly change. Maggie wants a basic plan in place for a couple of years while she gets back on her feet financially. Then we will review her strategy and adjust what we can.

If Maggie dies:

The 3 children need looking after – therefore a fund is now in place that should Maggie die, the children will at least get through their school years.

If Maggie has a serious health condition or illness:

If something serious happens to Maggie’s health, such as an episode of breast cancer or a heart attack, she will have a lump-sum of money to keep her household running for up to two years while she recovers.

The banks… Who’s debt are they covering? What’s the bigger picture?

The banks have done a good job of perpetuating this impression by advising everyone who gets a mortgage to get life insurance to cover the debt. Of course much of the time they are focused on covering their own liability – the mortgage.

Personal insurance is more than just paying debt if you die, but that a one place to start. Thinking about your own situation, who stands to lose if something happens to you? Are you only thinking about death, or are you also thinking about the ‘living insurance’ – covering your loss of earnings. Speaking with an experienced adviser can help you to think more deeply about these and other types of situations.

If you want to know more about this type of product, or you are concerned about your own policy and whether it properly covers your risks, drop me a line – I’d love the opportunity to chat and walk through it all with you.

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