We recently completed a comparison between Income Protection and Mortgage Protection offered by two Aussie banks and discovered some stark differences.
Our client, a young landscape designer looking to buy his first home was offered Mortgage Protection bundled with his home loan. He was told there’d be limited paperwork with no health questions. Plus he wouldn’t need to pay the insurance premium himself, instead it would simply be added to the home loan. It sounded too easy!
Flinders Wealth dove a little deeper to determine which policy provided the most appropriate cover for our client’s circumstances.
We compared the main policy features below;
| Income Protection | Mortgage Protection | ||
| Death Cover | Yes $350,000 | Yes $350,000 | |
| Monthly Cover | $3,750 | $2,100 | |
| Benefit Period - Accident & Illness | 5 Years | 3 Years | |
| Benefit Period - Stress & Mental Health | 5 Years | 1 Years | |
| Waiting Period | 30 days | 30 days | |
| Tax Deductible | Yes | No | |
| Health Questions | Yes | No | |
| Exclusions | No | All Pre-Existing Conditions | |
| Monthly Cost | $98 | $210 | |
| Tax Benefit | $24 | NIL | |
| Net Monthly After Tax Cost | $73 | $210 |
The key differences discovered were surprising;
· Income Protection provided an extra $1,650 of cover each month
· Mortgage Protection restricted mental health claims to one year
· Mortgage Protection restricted accident & illness claims to three years
· Mortgage Protection excluded all pre-existing health conditions
· Income Protection required health questions
· Mortgage Protection cost $210 per month v. Income Protection at $73 per month
In the wash up, the Income Protection was 65% cheaper (that’s a whopping $1,644 saving each year), provided more cover with longer benefit periods, and didn’t exclude all pre-existing health conditions.
Interestingly, Mortgage Protection restricted stress and mental health claims to one year. Recently stress and mental health claims have often exceeded 30% of disability claims in Australia which has dented many insurers’ profitability. Based on these limitations and high cost, Mortgage Protection is likely a very profitable line of business for the banks – good news for shareholders but not so good for policy holders.
Furthermore, to calculate the true cost of the Mortgage Protection we added the insurance premiums to a typical 25 year home loan and calculated the interest cost. Using average interest rates the total monthly cost balloons to over $400 a month. We’re guessing the bank may have overlooked this important fact.
