With Australian household debt to income ratios at record highs, it is vital to ensure that you have adequate personal risk protection cover in place to provide security over your home loan. It is also critically important to consider your cover needs if another family member has provided a guarantee to assist you in obtaining the loan.
Unfortunately, in the excitement of buying a home, very few prospective or existing borrowers consider the consequences of not being able work due to sickness or accident, or the financial impact of death, particularly with loans held jointly with a spouse, or with an additional guarantor.
Loss of income in the event of disability, even for a short period, will place stress on the ability to meet mortgage and/or personal loan repayments, and day to day living expenses. Without adequate Income Protection cover, you will erode savings, and risk falling behind in your mortgage payments. If you default on your loan, the bank may commence legal proceedings to repossess your home, or pursue a guarantor to seek payment of the liability.
In the event of the death of a borrower, the person who inherits the home, or is a surviving joint tenant will be responsible for the debt. If the property owner was a sole borrower, the bank may request the payment of the outstanding loan amount. If there is a shortfall in the sale price versus the loan amount, the bank may sue the beneficiary to recoup the balance of the loan. Without adequate death cover in place, you may be putting your surviving family at risk!
Many home owners falsely believe that they will have adequate protection via the default cover offered through their superannuation fund if they are temporarily unable to work, suffer permanent disability, or death. Unfortunately, there is often a huge discrepancy between the amount owing on the average mortgage, and the cover held via super.
It is crucial to understand that the Death/Total and Permanent cover offered via many funds is unit based, and will decrease significantly as you get older. The rate at which the cover reduces during your working life is typically much faster than the rate at which a mortgage is paid off!
The Income Protection cover offered by many superannuation funds may only offer a minimal benefit for a maximum period of 2 years, which in many cases will not cover mortgage payments in addition to other costs of living. In the event of claiming on your Income Protection held via super, the benefit may be reduced based on your pre disability earnings, and other offset provisions.
Some facts to consider in relation to covering your debts:
- For every home destroyed by fire, 3 are forced to be sold due to death, and 48 are forced to be sold due to disablement. 1
- 1 in 6 men, and 1 in 4 women are expected to suffer a disability between the ages of 35 to 65 that causes a loss of 6 months or more off work. 2
- 2 out of 5 Australians will suffer a critical illness such as Cancer, Heart attack or stroke before they reach 65.3
Here at Capricorn Investment Partners and the Pentad group, we have friendly advisers who specialise in risk insurance. If you would like to review your personal cover requirements today call toll free on 1800 679 000 for our Rockhampton office and 1800 804 431 for our Melbourne office.
1 Australian Bureau of Statistics: Australian Social Trends 2000 – Housing – Housing Stock: Home Fire Safety. 2 Institute of Actuaries December 2006. 3 NATSEM, Health and Income in Australia, 2003.
Scott Plunkett holds an Advanced Diploma in Financial Planning, and has worked in financial services since 1992. He has specialised for over 14 years in providing superannuation and risk protection advice to individual and business clients.
Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs.