Buying a home is a major milestone, but it also comes with a significant financial commitment. For most New Zealanders, that means taking out a mortgage. While you may be focused on securing the best interest rate or getting your deposit together, there’s another critical factor to consider; personal insurance.
Many people assume personal insurance is an optional extra, but when you have a mortgage, it’s a crucial safety net. Here’s why protecting yourself (and your family) with personal insurance should be part of your homeownership plan.
What is personal insurance, and why does it matter?
Personal insurance refers to a range of policies designed to protect your income, health, and financial stability. When taking out a mortgage, the key types of personal insurance to consider are:
- Life Insurance – Ensures your mortgage can be paid off if you pass away, providing financial security for your loved ones.
- Income Protection Insurance – Replaces a portion of your income if you’re unable to work due to illness or injury, helping you keep up with mortgage repayments.
- Total and Permanent Disability (TPD) Insurance – Provides a lump sum payment if you become permanently unable to work due to a disability, helping to cover your mortgage and living expenses.
- Trauma Insurance – Offers a lump sum payment if you’re diagnosed with a serious illness, such as cancer or a heart attack, reducing financial stress while you focus on recovery.
Each of these types of insurance serves a different purpose, but they all have one thing in common: they help prevent financial hardship in the face of unexpected life events.
Your mortgage is a long-term commitment
When you take out a mortgage, you’re committing to regular repayments over 20 to 30 years. But life is unpredictable - what happens if you suddenly lose your ability to earn an income? Without a plan in place, you (or your family) could struggle to meet repayments, potentially putting your home at risk.
Having the right insurance in place means that if something goes wrong, your financial commitments don’t become a burden. Instead of worrying about how to cover the mortgage, you or your family can focus on recovery or adapting to new circumstances.
The bank might require it
Some lenders in New Zealand require borrowers to have personal insurance, particularly life insurance, before approving a mortgage. This is especially true if you have a high loan-to-value ratio (LVR) or a single income household.
Even if it’s not a requirement, banks and mortgage advisers often strongly recommend personal insurance because they understand the risks associated with long-term borrowing. Having insurance in place can also make lenders more confident in your ability to manage your mortgage.
Protecting your loved ones
If you’re buying a home with a partner or have dependents, personal insurance is even more important. If something happened to you, would your partner be able to afford the mortgage repayments on their own? Would your family have to sell the home under financial stress?
Life insurance and other forms of personal cover ensure that if the unexpected happens, your loved ones won’t be left in a difficult financial position. They can continue living in the home without the added pressure of mortgage repayments.
The cost of insurance vs. the cost of losing your home
One common hesitation around personal insurance is the cost. But when compared to the financial impact of losing your home, the cost of cover is relatively small.
For example, income protection insurance might cost a few hundred dollars a month, but if it allows you to maintain your mortgage repayments during an extended illness or injury, the benefits far outweigh the expense. Similarly, life insurance can provide peace of mind knowing that your family won’t face financial hardship if the worst were to happen.
The key is to find a policy that aligns with your financial situation and needs. A financial adviser or insurance specialist can help you determine the right level of cover to ensure you’re protected without overpaying for unnecessary features.
When should you arrange personal insurance?
Ideally, you should consider personal insurance as soon as you start planning to buy a home. That way, you can integrate the cost of premiums into your budget from the outset and ensure you have cover in place from day one of homeownership.
If you already have a mortgage and don’t have personal insurance, it’s not too late. The sooner you put protection in place, the better prepared you’ll be for whatever life throws your way.
Final thoughts
Taking out a mortgage is a big financial step, and personal insurance is an essential part of protecting that investment. While it’s easy to focus on the excitement of homeownership, planning for the unexpected ensures you can stay in your home no matter what life brings.
By securing the right personal insurance - whether it’s life insurance, income protection, or trauma cover - you’re not just protecting your mortgage; you’re safeguarding your financial future and providing security for your loved ones.
If you’re unsure where to start, speaking with a financial adviser can help you navigate your options and find a policy that suits your needs.