INCOME OR MORTGAGE COVER: WHAT’S THE DIFFERENCE?

Mortgage or Income Cover, What is Best For Me?

For 10 years I have been asked by clients, "Mortgage or Income Cover, what is the best option for me?". This seems a simple question but it requires a lot of information to deliver a simple answer. If you wonder why your financial adviser is spending time going over your finances, this is why. It's essential for us to establish what will work best for your individual situation.

The difference between Mortgage or Income Cover seems minimal, but they are important at claim time. Both Mortgage and Income cover will pay a monthly amount if you are unable to work through accident or injury. They also have similar "payment terms" and "wait periods", I'll explain what that means below. Mortgage Cover is only available as an "Agreed Value" policy. Income Cover can be "Agreed Value" or "Indemnity", again I will explain these terms in a second. The amount of cover available will vary, Mortgage Cover can be 45% of gross income or 100-115% of the actual mortgage. Income cover can be 62.5% to 75% of gross income.

If you are interested but confused and don't want to read on I recommend that you get in touch with us here.

What Do All These Terms Mean?

As an insurance adviser it's my job to cut through the wording and make things as simple as possible for you. You may be thinking that's BS but remember we don't write the wording. So let's get into the terms I used above and put them into plain English. Well we can try.

Wait Period: This refers to the time you need to be too disabled to work before a claim pays. This is usually 4, 8, 13, 26, 52 or 104 weeks. You can go as low as 2. Unless there is another policy i.e. Loss of Revenue or staff policy in place most people won't go beyond 13 weeks.

Payment Term: This is how long you receive the monthly payment. Usually 2 years, 5 years, to age 65 or to age 70. There are other options from from as little as 6 months. This payment period can't be increased on claim so chose wisely at application.

Agreed Value: If you need to be sure of the amount received at claim time, this is the option for you. Your claim will be tax free too. Mortgage cover will be agreed value but Income protection you can choose. The maximum agreed value will be 62.5% of gross income.

Indemnity: The amount of your claim will be dictated to by your earnings before disability struck. You can insure up to 75% of the gross income. A claim time you will be responsible for paying tax but you can claim tax back on the premium.

What Does This Look Like In Reality?

You might be thinking that mortgage or income protection is a bigger question than you first thought, so here are a few examples to help.

Example 1:

Fiona and Frank are the archetypal 40 year old DINK's (Double Income, No Kids). The house has a hefty mortgage but they earn well and can afford a comfortable lifestyle. If one of them couldn't work though they would struggle to live on one salary. With reasonable savings in a rainy day account they could happily survive 3 months with one income after that it would be tough. Spending money on insurance premiums is not a priority but they know a long term disability could financially derail them.

As they are middle aged and high earners the premium to insure their full salary is more than they wish to pay. Besides they don't require the full salary covered to maintain their lifestyle. If one was permanently disabled they could change their budget and still be comfortable.

The solution was to each cover their actual mortgage plus 15%. The wait period would be 13 weeks. The payment period would be to age 65, retirement. This would mean if one couldn't work the mortgage would be paid and the other salary would be available for lifestyle. In the event of permanent disability they would have options until retirement.

Example 2:

Alex and Ashley are a couple in their late 20's and have just bought their first home together. No kids yet but that was in the plan for the near future. They need both wages to get through the month and have no savings as they put them all in the house.

It is clear to them that if one is unable to work, even for a short amount of time, they could get into financial hardship. What they need is a policy that responds quickly and covers as much of their income as possible but it has to be affordable. After consulting with an insurance adviser they realise as they're young insurance is relatively affordable.

They take out an indemnity income protection policy. This will cover 75% of their gross incomes with the advantage of having tax deductible premiums. It will have a 4 week wait period, to give them relief quickly as savings, sick and holiday pay runs out. It will have a payment period to age 70 to future proof against increasing retirement age.

Thanks For The Information, I'll Go Do It Myself

If you decide to do this yourself after reading this blog I would recommend that you don't. Get an adviser, it won't cost you any more on premium and it will save a lot of time. Remember, if you make a mistake you won't find out until claim time and then it is too late.

If you have bought a policy online and would like to make sure that it will do what you think then book an appointment with one of us. We can have a quick, no obligation chat and if you feel there is a need to make a change then we can help you do it right.

Cover Yours Ltd (FSP769531) and Marc Hamilton (FSP306046) are registered Financial Service Providers and you can search the register here. Marc Hamilton is a member of the FSCL Disputes Resolution Service. Cover Yours Ltd and Marc Hamilton’s disclosures can be found here or by emailing marc@coveryours.co.nz