People often get confused when it comes to insurance over loans, particularly with home loans. It’s very important to understand the differences in whose protected by what type of cover.
1. Lender’s Mortgage Insurance (LMI) – it is the most common form of insurance that makes the borrower legally bound to pay its premium if he/she is seeking to borrow more than 80% of the home loan amount. It is a means of protecting the lender in case the borrower fails to repay the loan amount in the long run. The lender is at a high risk when the upfront deposit is less than 20% of the property value. This type of insurance is only applicable on home loans as businesses, multinationals and industrial loans require more than 20% deposit in every circumstance.
Usually it is paid out at the time of getting the loan amount approved and the premium varies from loan to loan and deposit to deposit. This is something that the lender and the borrower decide in mutual understandings. Some lenders could be generous enough to allow the borrowers in paying LMI in short loan repayments if the borrower is not able to pay the premium upfront. In case the borrower fails to pay, the lender sells the home. If the home is sold above the loan amount, the lender takes away its amount and pays any excess dues to the borrower. If the price is below the loan amount, the borrower is still liable to pay the remaining dues. If the loan was of $400,000 and was sold for $350,000, the $50,000 loss would be covered by the mortgage insurance company to be paid to the lender, but the borrower is still liable for this repayment. The insurance does not provide any coverage of any sort to the borrower. It just provides an easy access to the borrower to get the home at lower than 20% deposits, which would not have been possible without the LMI.
2. Mortgage Protection Insurance – is basically the opposite of LMI. Instead of protecting just the lender, this loan protects the borrower from any calamities or mishaps should the borrower fails to repay loan at any time during the long run. The future is always unpredictable and job loss, medical illness, or deaths could happen to anyone.
In times like these, Mortgage Protection Insurance protects the borrower for the maximum duration of up to 30 months of the loan period. The insurance premium charges are always estimated and can be only truly calculated if you get in a deal with the mortgage insurance company. The borrower can also opt for life insurance to get maximum protection during the home loan tenure.
Based upon this policy, the borrower would get monthly payments in case he/she becomes ill or sick to work and earn money. Mostly the amount can be up to 75% of the pre-claim income, however differences can exist from policy to policy. The benefit period is usually till the age of 65 and in some cases, it could be longer than that if the borrower decides the terms and conditions with the insurance company.
With all that said, you should of get the facts on your own particular policy and what’s covered, or who’s covered.
3. Income Protection and Life Insurance – some insurance companies offer income protection policies, where, in such a case that you are injured or unable to work for some reason they will pay your income. Typically these policies cover 75% of your income and with a time limit of between between 12 months and five years. Life Insurances policies typically offer cover for death or disability. As with any insurance policy, they need to be investigated closely as to what is covered, what’s not covered, how much is covered etc.