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Smart Money

On top of this, we recommend all the normal insurances that fall under
financial planning, which are life, TPD, trauma.

Lender’s Mortgage Insurance?
Lender’s mortgage insurance (LMI) only covers the bank. If you don’t
have a 20% deposit, the bank will charge mortgage insurance, a one-off
fee that can be added to your loan if you don’t have enough equity in your
property.

If the bank needs to foreclose on your loan because you haven’t made
payments or something is going pear-shaped, then LMI covers the bank,
not you. You have to pay quite a large sum for LMI, and if something does
happen, it is the bank that gets the money. You never get your money back
if you default; it only covers that bank, not the client.

Rather than paying for LMI, a better solution might be to take out
death cover for the same level of cover. If you repay the loan down from
$500,000 to $250,000, and you’ve still got that $500,000 death cover, if
that person passes away, the loan is repaid, and the survivor, or the estate,
is still left with $250,000.
LMI is only there to protect the bank’s interest. They will get paid, but
there will be no surplus that goes to the estate or anyone else. The lender
is very much protected in that regard and that is why they love the LMI
policy. They capitalise it on to the loan so people don’t notice the financial
impact as much, but it potentially adds time to the term of the loan, and
it is only protecting the worst-case scenario for the bank.

If the bank is forced to claim against LMI, you do get the home or the
property, but that is all you get. I’m not saying it is a terrible cover, but
it is definitely more in the lender’s favour. They know they are going to
be repaid regardless of what happens, so they move on happily. But as
an individual, and if that is your only insurance, you are still susceptible
to all those things discussed before – heart attack, cancer, stroke, death,
income protection events.