Threefold

Income Protection vs Mortgage Protection

Head-to-Head: Income Protection vs Mortgage Protection

Understanding the differences between Income Protection and Mortgage Protection policies. 

Amidst the hustle and bustle of day-to-day life, it’s crucial to safeguard your hard-earned success against life’s unexpected twists and turns. Whether you’re scaling the corporate ladder or carving your path as an entrepreneur, financial security and resilience form the cornerstone of your lifestyle.  

While you don’t like to think of it happening to you, more than 170,000 Kiwis were forced to stop working in the year ending June 2020, due to injury or illness – which equated to approximately 6% of the total employed population in New Zealand.  However, according to the Financial Services Council (FSC) Research Report – “Money & You: Taking Cover” (December 2022), only 11% of New Zealanders have Income Protection, meaning that for many the impact of not being able to work would have added a significant burden to an already stressful situation.

Insurance steps in when the unexpected happens, providing a safety net to preserve your income and protect your assets. But not all insurance policies are created equal, and knowing the key distinctions can make all the difference when it comes to safeguarding your lifestyle in the event of a medical event or accident.

Enter the dynamic duo of Income Protection policies: Income Protection and Mortgage Protection. While they both offer valuable coverage, they cater to different aspects of your financial life, and understanding their nuances is crucial when determining what product (or combination of products) is right for you.

The Two Contenders

First up, let’s summarise each policy. 

Income Protection insurance pays out a benefit in the event you are unable to work due to illness or injury. It offers a percentage of your income to cover expenses during illness or injury, but payments are offset against any other form of benefit (eg. ACC) or income (eg. rent, dividends etc) you may receive. 

On the other hand, Mortgage Protection is an agreed value based on your rent or mortgage at the time you take out the policy. It is not offset against other forms of benefits or income in the instance your ability to work is impacted by illness or accident, ensuring that your mortgage or rent payments are covered and your lifestyle is protected from financial strain.

Understanding the Nuances

While Income Protection and Mortgage Protection can appear similar at first glance, there are several nuances to consider when determining what cover is right for you.

To demonstrate these, let’s paint a picture…

Meet Jane Smith, a go-getter professional

 with dreams as big as her ambitions. With an annual salary of $100,000, Jane’s financial future seems bright. She owns a fantastic home in a sought-after location and has monthly mortgage repayments of $6,000 per month. She has a great lifestyle and some savings tucked away for a rainy day. 

In scenario A, Jane has an agreed value Income Protection policy, and has chosen coverage that would amount to $5,208* per month (equating to approximately 62.5% of her gross income, which is the maximum amount allowed under an agreed value policy).

In scenario B, Jane has selected a Mortgage Protection policy. This covers 115% (the maximum amount under a Mortgage Protection policy) of her contractual mortgage payments. This would equate to an agreed value amount of $6,900* per month, ensuring her home will always be her sanctuary.

Now, picture Jane facing a medical hurdle due to sickness or illness. If she did not have insurance, she would find that she would not be covered by ACC and so would need to apply for a sickness benefit or similar, with no level of certainty that she would receive support. 

But… as we outlined above, Jane is prepared and has insurance in place to help in just this situation.

Under scenario A, Jane will receive her agreed-upon benefit amount of $5,208* per month under her Income Protection policy – noting that if she is receiving any other source of income during this time (eg. rent, dividends etc), it would be offset by her policy.

Under scenario B where she has a Mortgage Protection policy, Jane would receive her agreed value payment of $6,900* per month with no offsets.

So relatively similar at this point, with the main difference between the two policies relating to offsets. But here’s where the plot thickens: an accident strikes, and Jane is no longer able to work.

Without insurance, Jane would rely on ACC, receiving 80% of her income or approximately $6,206* per month (net).

Now under scenario A where Jane has an Income Protection policy, if she was to have an accident she would receive 80% of her $100,000 salary (or $6,206* per month net) from ACC. However, due to the offset clause, she would not receive any top-up from her Income Protection policy as the amount received from ACC surpasses her agreed value cover.

Under scenario B, where Jane has Mortgage Protection cover, if she has an accident Jane would receive the $6,900* per month agreed value from her Mortgage Protection policy, in addition to the $6,206* per month from ACC – a total of $13,106* per month.

Choosing the Right Policy for You

These scenarios spotlight the importance of understanding the nuances between different policy types and on choosing the right insurance for you.

While Income Protection offers invaluable support – especially if your income level is significantly higher than your mortgage or rent payments – Mortgage Protection has the potential to also provide an extra layer of security in the event of an accident.

The critical thing to note is that there is no one-size fits all in terms of what policy is best. If Jane’s income was significantly higher than her mortgage payments, then the above scenarios could be quite different. It is also important to note that we have focused on one major difference between these two policies but there are several other factors that should be taken into account when considering your options.

When selecting what cover you require, it all comes down to individual circumstances and understanding the nuances of the policies you are considering, so that when the unexpected happens, you have the right cover in place to preserve your lifestyle.

The best thing to do is to always seek advice from a professional who will review your individual circumstances and needs, and then advise what policy (or policies) are best for you.

If you are interested in understanding your options, or in reviewing your current policies, get in touch with our team for a complementary review. Speak to your adviser, or email us at clientservices@threefold.co.nz with the subject ‘Complementary Insurance Review’.

* All payments listed as net.