Cui bono?
You may think this is the cry made by an Australian trying to get the attention of U2’s lead singer, but it is actually a Latin phrase beloved by both criminal investigators and conspiracy theorists.
It asks the question “who benefits?”
And the answer, in the case of some insurance products packaged with consumer goods might just be “not you”; at least according to the Australian Securities and Investment Commission (ASIC) in a report on ABC news online earlier in 2014.
According to the report, many consumers are unaware that the insurance cover they were purchasing would pay out the lender and not the person that took out the cover.
The insurer in some cases is still then entitled to attempt to recover the costs from the consumer, who has already paid for the insurance policy.
1. Lenders Mortgage Insurance
While the report does not mention Lenders Mortgage Insurance (LMI), this is exactly how LMI works.
Most home buyers who have taken out a home loan will be familiar with LMI. Unless you have quite a substantial deposit (in most cases 20% of the purchase price of the property) you will not get a home loan unless you take out LMI.
LMI covers the lender in the unfortunate circumstance that you are unable to continue making mortgage payments and the lender is forced to sell your property.
If the lender makes a loss, they are covered by the LMI that you paid for. You, however, are not covered by LMI and the insurer may seek to recover these costs from you.
LMI is a very useful product and helps thousands of people every year to purchase properties that they would not otherwise be able to purchase.
If you can afford the mortgage repayments and want to get off the rental treadmill or you see an investment opportunity but don’t have a big deposit, LMI helps you get a home loan for a few extra dollars a week on your loan repayment.
2. Life insurance
So the bank is being looked after, but what about you? LMI won’t help you make home loan repayments if you get sick, if your spouse dies or if you lose your job.
What would you do if confronted by one of these situations? Many people have life insurance, often through their superannuation, and this is their plan to pay off the mortgage if they die.
It’s not a bad plan, but you have to die first, and you have to make sure your policy will cover the costs.
Does it? Will a non-fatal heart attack cost you the family home? It can, and it has.
Fortunately there is an alternative.
3. Mortgage protection insurance
As well as covering life, mortgage protection insurance provides financial assistance if you become terminally ill, involuntarily unemployed, or are diagnosed with certain medical conditions or disabilities.
Offering additional cover when you need it most, two people can be covered within one policy, and you can often select your premium based on your budget, cover amount, age, gender and smoker status. You can also adjust your level of cover as your circumstances change.
What’s more, the policy doesn’t end when you pay off your mortgage, and benefits are paid directly to you and not your lender. There are many mortgage protection products available so it’s important to do your research!
These are well worth looking into. After all what have you got to lose? (Hint: your house).
Have you ever struggled to keep up with your mortgage repayments due to illness or involuntary unemployment? Share your story by leaving a comment on this post.
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