What’s the difference between Mortgage Protection Insurance and Income protection?
Surprisingly, mortgage protection insurance and income protection insurance are very similar. The purpose of both mortgage protection and income protection is to protect your income, and therefore your ability to continue meeting your financial obligations. Both types of cover provide a monthly benefit to replace your income and with both covers, you can select the amount of time you would like to wait before you receive a benefit and also the amount of time you would like to receive a benefit for.
Although mortgage protection and income protection provide a monthly benefit should you be unable to work due to an accident or illness, there are some small differences that you should be aware of.
How it works with ACC
Most insurers will have a clause in their income protection wording which states that any income replacement benefit you are entitled to receive will be offset by the amount of any ACC benefit you are receving. This could essentially mean that if you are unable to work due to an accident, and you are recicing a benefit from ACC, there may be no benefit payable from your insurer.
By comparison, most mortgage protection benefits have a portion of cover that is not offset by ACC. For example, Asteron do not offset up to 45% of a potential claimable benefit. This means that as a consumer, you may be entitled to a benefit from ACC and your insurer. However, in most cases, the amount you can insure under a mortgage protection benefit is less than what can be covered under an income protection benefit (see below).
The amount of cover and type of benefit
With income protection, insurers will allow you to cover up to 75% of your income under an income protection benefit. To cover up to 75% of your income would mean that you would need to take cover under an indemnity basis which means that any benefit you receive will be financially decided upon at the time of claim and will be subject to tax. There is however, the option to cover a lesser amount of your income under an agreed value basis which means that any potential benefit payable is agreed upon at the time you apply for cover with the insurer and any benefit received is also not subject to tax.
When looking at a mortgage protection benefit, most insurers will allow you to cover up to 115% of your regular mortgage repayment amount or up to 62.5% of your income. The type of cover offered is also on an agreed value basis which means that any benefit you may receive in the future is agreed upon with the insurer at time of application. Also, as with agreed value income protection, any benefit received is not subject to tax.
As everyone’s situation is unique, the best person to speak to about protecting your financial stability is a financial adviser. A qualified financial adviser will be able to look at your situation and advise you on whether or not an income protection or mortgage protection benefit would be more suitable for your needs. But whatever the benefit you ultimately decide upon, it is important to ensure you have a saftey net in place for yourself and your family.