Buying guide
Do you need life insurance for a mortgage?
Everything you need to know about insurance now you’ve got a mortgage
Last updated: 13 February 2024
Buying a new home and getting a mortgage is a huge learning curve, especially if it’s your first time. And during the process you may be asking - do you need life insurance for a mortgage?
To make your life and your purchase easier we’ve got the answer and more.
Do I need life insurance when I buy a home?
The short answer is no, but the long answer is a little more complicated. Your lender won’t require you to get life insurance and it’s not a legal requirement either, but in most cases it’s a good idea (I’ll explain why later).
On the other hand, your lender will require you to have house and contents insurance before they formally approve your home loan. This is because your home is the security for your loan, meaning if you can’t make your repayments your lender will eventually sell your home to repay the mortgage. Your lender requires you to insure it to protect its value, and the money you owe.
Why is life insurance a good idea when you buy a home?
Life insurance is generally a good idea when you incur debt, especially if you’ve purchased your home together with a partner, friend or family member. That’s because if you pass away whoever you purchased the property with will usually be responsible for taking over 100% of the mortgage payments. If they’re your significant other they may also have to cover funeral costs, and extra childcare.
A good life insurance policy will repay some (or even all) of your mortgage, pay for funeral costs and provide some living expenses so that whoever you bought a home with can keep the property and not have to worry about money while they deal with your passing.
It's always a good idea to speak to an advisor before getting insurance.
How much cover do I need?
Life insurance usually provides a tax free lump sum of money to your family or nominated persons in the event of your death or other events that you’re covered for, such as total and permanent disability or terminal illness.
There’s no magic number when it comes to the right amount of life insurance cover. What’s right for you will depend on your debt, your dependents, their living expenses and your financial circumstances. To help you decide here are a few questions to ask yourself:
- How much debt do I have and what are the regular repayments?
- How much do my family and/or dependents need to cover living expenses?
- What is my partner’s ability to earn an income?
- What extra costs will be incurred after I pass? (i.e. childcare, funeral costs).
- How much will it cost to cover future costs like your child’s education or your partner’s retirement?
It’s often recommended that your life insurance cover should be enough to pay off your mortgage, cover funeral costs and at least a few years of living costs. Your cover could also pay for your child’s education and your family’s living costs until they turn 18 - whatever’s right for you. Just keep in mind that a higher level of cover generally means higher insurance premiums.
If you've got people who depend on you it's worth considering life insurance, especially if you have a mortgage.
What other insurance should I consider as a homeowner?
At a minimum you need house and contents insurance, and you should also seriously consider life insurance. But there are other types of cover that you may benefit from, depending on your circumstances.
- Health insurance: provides access to the private healthcare system, which may result in quicker treatment times.
- Income protection insurance: provides cover if an illness or injury renders you unable to work.
- Mortgage protection insurance: provides cover to ensure you can still make your mortgage repayments if you’re unable to work.
According to a representative survey by the Financial Services Council around 70% of Kiwis are underinsured. Don’t make the same mistake. If you’re unsure what’s right for you, seek advice from an experienced and qualified financial advisor or insurance advisor. They’ll be able to help you figure out what insurance you need and what level of cover is appropriate for you and your family.
DISCLAIMER: The information contained in this article is general in nature. While facts have been checked, the article does not constitute a financial advice service. The article is only intended to provide education about the New Zealand insurance sector. Nothing in this article constitutes a recommendation that any type of insurance is suitable for any specific person. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making decisions about insurance, we highly recommend you seek professional advice.
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