Diana Clement: how to keep your castle

Everyone who buys a home should ask themselves for how many weeks or months they could continue to pay their mortgage without a fulltime income. Photo / Getty Images

Your home is your castle. But what would happen if you couldn't pay the mortgage? That happens to all too many Kiwis every year who lose their income due to illness, accident or redundancy.

Most will survive financially. Everyone who buys a home should ask themselves for how many weeks or months they could continue to pay their mortgage without a fulltime income.

Insurance to protect your mortgage comes in several different guises. Life insurance is important to pay off your mortgage should you die.

What's more, life insurance will usually pay out a lump sum or the full sum insured if you're diagnosed with a terminal illness.

As well as life insurance, mortgage broker Geoff Bawden, of Bawden Consulting, says he will always recommend income or loan (mortgage) protection insurance to clients who are buying homes.

Income protection pays up to 75 per cent of before tax income, and mortgage protection covers the mortgage repayments should the home owner be temporarily or permanently disabled due to illness or accident.

Many of these policies don't cover redundancy and bankruptcy, although some do, or offer it as an optional extra.

They include companies such as AA Life, OnePath and Partners Life.

Income protection cover tends to be more expensive than mortgage protection, says Conor Sligo, founder of LifeDirect.co.nz, who now works as a consultant. But there's not much in it.

Mortgage protection on the other hand will still pay out if you have an accident and are receiving ACC, whereas income protection usually doesn't in that situation, he says.

Typically this insurance kicks in to pay a percentage of your mortgage or the entire mortgage if you can't afford repayments while you're off work.

In return for a monthly premium it's most common for policies to cover you for two years if you become temporarily or permanently disabled or six months if you lose your job and have redundancy cover.

The cost of insurance depends on the cover, the stand down and payment periods and the individual's health.

As an example, income protection cover for a 40-year-old air-conditioning engineer covered for 75 per cent of a $70,000 annual salary with a four-week stand down and two-year payment period would cost between $26.41 per fortnight with Fidelity Life and $41.47 with AMP via LifeDirect.

The same man with a $500,000 mortgage and $1474 fortnightly repayments would pay between $20.54 a fortnight from OnePath and $31.90 with AIA via LifeDirect.

Adding life cover of $500,000 would bring the premium to a range of $34.36 to $49.91 with OnePath and Asteron Life.

Trauma cover is often tacked onto such policies as well and provides you with a one-off payment if you fall ill with a named condition such as stroke, cancer and heart disease, and adds $5 to $10 a fortnight to the price.

Mortgage and income protection insurances are often sold by banks when arranging a mortgage.

They can also be bought through insurance advisers, or in some cases direct from companies such as Cigna or comparison websites.

One advantage of using an independent adviser is that this person should go into bat for homeowners come claim time.

That can be extremely helpful in time of illness or stress or if the claim is borderline and the insurer declines it.

Another advantage is that the policies differ considerably under the bonnet and it can be hard for someone who doesn't understand the fine print to know which policy is most suitable for them.

Insurance cover isn't compulsory with mortgages, despite popular perception.

However, financial professionals argue that if home buyers can't afford to cover their risks, they can't afford the home.

Bawden says it seems to many people like a waste of money until they have to use it and then it's a financial lifesaver.

If you truly still can't afford full cover, but still want to buy the house, then there are some options you can take says Life Direct's Sligo.

Those can include insuring a lesser percentage of your income or mortgage payment especially if you have a partner contributing.

The premiums drop if you can extend your wait period before a claim is paid, or reduce the period that the benefit is paid.

Most insurers, says Sligo, have "essentials" style cover that is cheaper.

This may not cover you for all illnesses that stops you working, but will cover the most common ones.