Buying a home is one of the biggest financial commitments we will ever make. With home ownership comes the responsibility of a mortgage, a long-term financial obligation that can span decades. While planning for the future is exciting, it’s essential to consider how your loved ones would manage financially if the unexpected happened.

This is where life insurance plays an important role. It provides a safety net that your family won’t be burdened with mortgage repayments if you pass away. In this blog, we will consider the importance of life insurance when buying a home and taking on a mortgage, the benefits and drawbacks, ownership options, and key factors to consider.

The Importance of Life Insurance When Buying a Home

Purchasing a home is a milestone achievement and most people will rely on a home loan to finance their property purchase. This debt then becomes one of the biggest financial obligations you will likely have.

Life insurance acts as a financial backup plan. If you were to pass away, the payment from a life insurance policy could be used to repay the mortgage balance, allowing your family to continue living in the property without the financial strain of a mortgage. It helps to reduce the risk that the property may need to be sold or your family needing to dip into savings to meet the loan obligations.

Further, life insurance isn’t just about protecting the home. It also provides peace of mind, knowing that your family’s essential needs are secure. Beyond the mortgage, life insurance also helps to cover other important areas for example loss of income, children’s education costs, other liabilities and funeral expenses. Life insurance can be a versatile solution that can be tailored to your individual needs.

Benefits of Life Insurance for a Home Loan

1 - Protection Against Financial Hardship

Life insurance helps to protect your family from financial difficulties following your passing. It offers them the ability to remain in the home without the burden of a mortgage.

2 - Flexibility

Life insurance can be tailored to align with the individual’s needs. This can include the mortgage and other important financial obligations.

3 - Peace of Mind

It’s difficult to put a price on peace of mind. By obtaining cover it can help to know your family is secured, especially if you are the primary income earner of the household.

Drawbacks of Life Insurance for a Home Loan

1 - Additional Cost

For homebuyers, adding life insurance premiums to their expenses may feel like an extra burden.

2 - Policy Options

The range of options can be overwhelming, from personally held cover to cover held within superannuation. Without proper guidance, you might select a policy that doesn’t fully meet your needs.

3 - Risk of Underinsurance

Like with most insurance there is the risk that the cover amount is not sufficient to meet your needs.

Ownership Options: Personal and Superannuation

When purchasing life insurance for a home loan, the two most common ownership types are holding the cover personally or through your super fund. Each option has advantages and disadvantages, some of which are detailed below.

Personal Ownership

For personal ownership the life insurance policy is held directly by the individual. The premiums are paid from regular cashflow and in the event of a claim the policy is paid directly to the nominated beneficiary.

Advantages

Fast Claims - for personally owned policies the payment is simple as it is paid directly to the beneficiary of the policy
Taxation - The premiums are not tax deductible, and therefore the payments are tax-free to the beneficiary of the policy

Disadvantages

Cashflow - premiums paid personally can affect the individuals cashflow

Inside Super

When held within a super fund, the super fund trustee owns the policy, and premiums are deduced from the super balance.

Advantages

Cashflow - can offer a cost-effective solution for those that don’t want to impact their personal cashflow
Tax - policies held by super are generally tax-deductible to the super fund

Disadvantages

Potential Delays - as the policy is held within super the trustee must approve the release of funds
Tax - Benefits may be taxed if paid to a non-dependent beneficiary
Premium - over time the premiums can reduce your retirement savings

Key Considerations When Choosing Life Insurance for a Home Loan

Amount of Cover

It’s important to ensure that the amount of cover is sufficient to meet your needs. Consider future changes and upcoming expenses such as renovations.

Other Insurance Types

For comprehensive protection, consider combining the life cover with other policies such as income protection, TPD and trauma cover. Each of these offer protection for different purposes and can provide cover for unforeseen events.

Review the Policy Regularly

Your financial situation and family circumstances will change and evolve over time. It’s important to review the policy often to ensure it remains aligned with your needs.

Tax

If you are unsure of which ownership structure best aligns to your needs, consult with a financial advisor. They will be able to consider the tax implications of your policy structure and provide tailored advice.

Policy Comparisons

Comparing options from different providers is beneficial to check that you are getting the best value for your premiums.

How to Get Started

Assess Your Needs

Start by reviewing your home loan balance, family situation, income, and financial goals. Consider how much cover you would need to feel protected and for your family’s financial stability.

Research

Compare life insurance providers and policies to find the best fit for your circumstances. Look at factors such as premium, cover options, underwriting and claims history. During this time it is important to consider the various ownership structures and the tax implications.

Application

At the application stage you will be required to provide details of your current and past health, doctors information, lifestyle and financial situation.

Review

As your circumstances change, revisit the policy and review it to ensure it continues to meet your needs.

Support

A financial advisor can help you to understand the complexities of life insurance, including ownership options, tax considerations, policy research, and how to tailor a policy to your needs.

Life insurance for a home loan is an essential tool for protecting your family’s future. It offers peace of mind, by allowing your loved ones to avoid financial hardship or the possibility of losing their home in the event of your passing.

For expert guidance on life insurance and mortgage protection, reach out to our qualified team. We can help you navigate the complexities and set up a policy that offers comprehensive cover and lasting peace of mind.

About Us

After working as an advisor for a decade, Joel founded Unified Wealth.

Unified Wealth specialises in helping clients who are facing life’s big decisions.

Whether you’re contemplating your first property, growing your family or starting your investment journey we can help you focus on the simple steps to help you make your goals reality.

Our priority is making sure you have all the right information available to make the best possible decisions for you and those you love.

Our company values are:

Unity - We are most effective when we work together as a team

Trust - We are trustworthy and act in your best interests

Transparency - We are honest and communicate openly

Education - We are committed to lifelong education

At Unified Wealth our team is highly experienced and provides goal-based advice and solutions for a range of advice strategies.

Speak to our team today.

Life Insurance for a Home Loan