Life insurance for a mortgage: Do you need it?

Do I need life insurance to buy a house?

No, you aren't legally obligated to take out life insurance when you buy a home. It's not like home insurance which you almost always need to have in place before you move in.

However, taking out life insurance when you buy a home can offer financial security and be worthwhile, depending on your circumstances.

Owning a home and life insurance

For many people, owning a home is a trigger for buying life insurance. This is because a mortgage is such a substantial debt and your ability to pay the mortgage is contingent upon you being alive and healthy enough to continue working.

So no, it’s not mandatory, but it’s certainly a good idea, particularly if you have a family or a partner that relies on your incom

Can life insurance cover my mortgage repayments if I can’t work?

Life insurance only pays out if you die or become terminally ill.

If you’re looking for types of cover that can support you to make mortgage repayments in the event you can’t work, consider the following:

• Income protection insurance. This can help cover mortgage repayments if you find yourself unable to work due to sickness or injury. It can pay you around 75% of your monthly income.
• Total & permanent disability insurance (TPD). This covers you if you get severely injured or sick. For example, you become blind or paralysed and the permanent disability keeps you from being able to work.
• Trauma insurance. This can cover you if you are diagnosed with a critical illness, like cancer.

Our expert says: Life insurance when buying a home

"Mortgage protection insurance covers your home loan repayments if you're injured and can't work. But an income protection insurance policy can cover a much wider range of expenses and is probably more useful for most people. Check to see if you already have life insurance cover through your super fund too."

Richard Whitten

Senior Money Editor

What’s the difference between lenders’ mortgage insurance (LMI) and life insurance?

They’re two very different products.

LMI is a term you’ll likely hear often while you’re buying a home. It is an insurance product that protects the lender. The homeowner is responsible for paying LMI, unless they have a 20% deposit for the property.

Life insurance is designed to financially protect you and your family in the event of death or severe illness. It can be brought up around the time you’re purchasing a home simply because it’s such a large debt to take on and can be wise to

FAQs

• Should homeowners consider income protection?

  Yes, if you're worried about how you'd pay for your mortgage if you got sick or injured, income protection can help. Just keep in mind, income protection only covers a certain time period. This is often 2 or 5 years – in some cases, policies will cover you up until 65.

• What exactly is lenders mortgage insurance?

  Lenders mortgage insurance (LMI) and life insurance are 2 different products. LMI is protection for your lender, not for you. LMI doesn't cover you if you miss your mortgage repayments.

• Can I use my life insurance to buy a house?

  No - the only types of life cover which accrue a 'cash value' are some types of whole of life cover, but these are no longer available in Australia.

• What can a life insurance payout be used for?

  A lump sum from a policy can be used for any purpose, not just paying down a mortgage. It may be best to speak with a financial planner in the event you come into a large amount of money.

Written by

Gary Ross Hunter

Journalist

Gary Ross Hunter has over 6 years of expertise writing about insurance, including life, health, home, and car insurance. Having reviewed hundreds of product disclosure statements and published over 800 articles, he loves simplifying complex insurance topics for everyday readers. Gary has contributed to major outlets like Yahoo Finance, The Sydney Morning Herald, and news.com.au, and holds a Bachelor of Arts (Honours) in English Literature from the University of Glasgow, along with a Tier 2 General Advice certification, ensuring his work adheres to ASIC’s RG146 standards. See full bio

Gary Ross's expertise

Gary Ross has written 577 Finder guides across topics including:

• Health, home, life, car, pet and travel insurance
• Managing the cost of living

Co-written by

Peta Taylor

Publisher of Insurance

Peta Taylor is a publisher at Finder, working across all of insurance. She's been analysing product disclosure statements and publishing articles for over 2 years. Peta is passionate about demystifying complex insurance products to help users make well educated decisions with confidence. Peta is part of Finder's insurance awards team and works alongside editorial and insights experts to bring users the best insurance products every year. See full bio