Your mortgage might be your biggest monthly expense. But what happens to it if you’re no longer around to make the payments? Most Australian families don’t think about this until it’s too late. Life insurance for mortgage borrowers in Australia isn’t just about protecting a loan. It’s about keeping your family in their home when they’re already dealing with loss.
The average Australian mortgage sits at around $600,000, according to the Australian Bureau of Statistics. That’s a massive debt to leave behind. This guide shows you how to work out sensible cover amounts, what options suit mortgage holders, and how to avoid the mistakes that leave families underprotected.
Why life insurance matters when you have a mortgage
Your bank doesn’t care if you die. They still want their monthly repayment. And if your family can’t pay, they’ll sell the house to recover the debt.
Most Australian lenders don’t require you to have life insurance. But that doesn’t mean you should skip it. When one income disappears, the surviving partner often can’t cover the mortgage alone. They’re forced to sell, downsize, or default.
Consider a Sydney couple with a $700,000 mortgage. If one partner dies and contributed 60% of the household income, the survivor faces a $3,500 monthly payment on reduced earnings. Within months, they’re behind on repayments.
Life insurance pays out a lump sum that can clear the mortgage entirely. Your family keeps the home. They’re not forced to make major financial decisions while grieving.
Here’s what life insurance covers:
- Outstanding mortgage balance
- Funeral and estate costs
- Ongoing household expenses
- Children’s education costs
Here’s what it doesn’t cover:
- Investment property loans (unless specifically included)
- Existing health conditions (if excluded in your policy)
- Death from excluded activities like extreme sports
How much life insurance do mortgage borrowers typically need?
Most Australians underinsure. They match their cover to their current mortgage and forget about everything else their family needs.
The formula isn’t complicated. Start with your mortgage balance. Then add three to five years of living expenses. Include any other debts like car loans or credit cards. That’s your baseline.
But this changes based on your situation. A single-income family needs more cover than dual-income households. Parents with young children need more than empty nesters.
1. Base it on your outstanding loan balance
Your minimum cover should equal your mortgage. If you owe $600,000, you need at least $600,000 in cover.
This protects your family from forced sale. They can pay off the loan immediately and own the home outright.
But minimum isn’t always sensible. Consider inflation. A $600,000 mortgage today might require $650,000 to clear in five years, depending on interest rates. Fixed-rate loans offer more predictability than variable rates here.
Example: A Melbourne borrower with a $550,000 variable loan at 6.5% might pay $3,500 monthly. If rates rise to 7.5%, that jumps to $3,850. Build a buffer into your cover amount for rate changes.
2. Include dependants and living costs
Your mortgage isn’t your only expense. Your family still needs to eat, pay bills, and cover school fees.
ASIC’s MoneySmart calculator estimates that a typical Melbourne family with two children spends $85,000 yearly on living costs. That’s excluding the mortgage. Over five years, that’s $425,000.
Real example: A Geelong family, both parents working part-time, has a combined income of $95,000. Their mortgage is $480,000. If one parent dies, the survivor earns $45,000 alone. They need a cover of at least $730,000 ($480,000 mortgage + $250,000 for five years of reduced income).
The Australian Securities and Investments Commission recommends using their budget planner to calculate your family’s actual costs. Don’t guess.
Comparing life cover options for home loan protection
You’ve got three main ways to get life insurance in Australia. Each has trade-offs that matter when you’re protecting a mortgage.
The cheapest option isn’t always the smartest. Speed of payout, control over beneficiaries, and flexibility all matter when your family needs money fast.
1 Life insurance through super
Most Australians already have some life cover through their superannuation fund. It’s automatic and deducted from your super balance.
But the default cover is usually low. The average is around $70,000 to $100,000. That won’t clear a typical Australian mortgage.
You can increase your cover inside super. Premiums are cheaper than standalone policies. But there’s a catch. Claims take longer to process. Your family might wait weeks or months for the payout, and they can’t access the money until the death benefit is released.
ASIC’s MoneySmart warns that super-based cover might not pay directly to your partner. It goes to your estate first, then gets distributed according to your will or succession.
A retail life insurance policy gives you full control. You choose the cover amount, the beneficiaries, and how long the policy lasts.
Premiums cost more than super-based cover. But the payout goes directly to your nominated beneficiary. No estate delays. No waiting for super fund approvals.
For mortgage protection, standalone policies offer guaranteed renewability. Your insurer can’t cancel your cover if your health changes. That matters if you’re diagnosed with a serious condition after buying the policy.
Comparison:
| Feature | Super Cover | Standalone Policy | Lender Cover |
|---|---|---|---|
| Payout speed | Slow (weeks) | Fast (days) | Moderate |
| Cover amount | Usually low | Flexible | Fixed to a loan |
| Control | Limited | Full | Limited |
| Cost | Cheap | Moderate | Expensive |
Common mistakes when setting up life insurance for your mortgage
Australian borrowers make the same errors repeatedly. These mistakes leave families scrambling when tragedy strikes.
The biggest problem? Buying based on price instead of suitability. A cheap policy with exclusions is worthless if those exclusions apply to you.
Example: A Brisbane borrower chose the cheapest $500,000 policy. It excluded heart conditions. He died of a heart attack at 48. His wife got nothing and lost the house.
Other frequent mistakes include:
- Assuming joint cover protects both partners equally (it doesn’t)
- Forgetting to update the cover after refinancing to a bigger loan
- Choosing the “cheapest” policy without checking exclusions
- Ignoring inflation when setting cover amounts
- Believing super cover equals adequate mortgage protection
- Not reviewing coverage when income or family size changes
Joint life policies pay out once. If one partner dies, the survivor has no cover. That’s dangerous if both contribute to mortgage repayments.
Many Australians also forget to review their cover after major life changes. You refinance from $400,000 to $600,000. But your life insurance still covers $400,000. Your family is $200,000 short.
How to review and adjust your life insurance over time
Life insurance isn’t a set-and-forget product. Your cover needs to change as your mortgage and family situation change.
The Australian Taxation Office doesn’t allow tax deductions on personal life insurance premiums. But knowing when to adjust your cover can save your family from being over or underinsured.
Review your policy annually. Check it immediately after major life events like refinancing, having children, or changing jobs.
1. When your mortgage changes
You refinance to a bigger home. Your loan jumps from $450,000 to $650,000. Your life insurance should jump too.
Some policies offer guaranteed insurability. You can increase coverage without new medical exams. That’s valuable if your health has declined since you first bought the policy.
Example: A Perth borrower increased their loan by $180,000 for renovations. They updated their life cover from $500,000 to $680,000. Cost increased by only $15 monthly because they used their existing policy’s guaranteed increase option.
When you’re close to paying off your mortgage, consider reducing cover. If you owe $80,000 on a home valued at $900,000, you might not need $500,000 in coverage anymore.
2. When your family situation changes
Your second child arrives. Your expenses increase. You might need an extra $200,000 in coverage to maintain their lifestyle if you die.
Update your beneficiary nominations, too. Many Australians forget this step. They remarry, but their ex-spouse is still listed as beneficiary.
Major triggers for review:
- Birth or adoption of children
- Divorce or separation
- Partner stops working
- Inheritance or windfall changes your financial position
- Diagnosis of a serious health condition
- Starting a business or changing careers
Getting advice before buying or updating cover
Life insurance is complex. Australian policies vary widely in what they cover, exclude, and cost.
A financial adviser or insurance broker can compare products across multiple insurers. They understand which policies suit mortgage holders and which ones have problematic exclusions.
ASIC recommends comparing at least three providers before buying. Look beyond the premium cost. Check waiting periods, exclusions, and claim success rates.
Cost example: According to Canstar and Finder data, a typical 35-year-old non-smoking Australian with an $800,000 mortgage might pay $30 to $45 monthly for adequate life cover. That’s less than most people spend on streaming services.
A 45-year-old with the same mortgage might pay $70 to $90 monthly. Smokers pay roughly double these amounts.
Get quotes based on your actual health and lifestyle. Online calculators give estimates. But your real premium depends on medical history, occupation, and hobbies.
Questions to ask your broker:
- Does this policy cover death from any cause?
- What are the exclusions?
- Can I increase cover later without medical checks?
- How long does the average claim take to process?
- What happens if I can’t afford premiums temporarily?
Conclusion
Your mortgage is a decades-long commitment. Your life insurance should protect it for as long as your family depends on that home. The right cover amount balances your loan size, your family’s living costs, and your long-term financial goals.
Most Australian mortgage holders need more cover than they think. But overpaying for unnecessary features isn’t smart either. Review your policy annually. Adjust it when your loan or life circumstances change.
Your family shouldn’t lose their home because you are underinsured. Compare life insurance for mortgage borrowers in Australia to see what genuinely fits your situation. Start by calculating your actual needs using ASIC’s MoneySmart tools, then get quotes from at least three providers.
FAQs
Can I get life insurance if I already have a pre-existing medical condition and a mortgage?
Yes, but your options and premiums will vary. Some insurers exclude your condition from coverage. Others charge higher premiums but cover everything. Specialist brokers can find insurers who accept applicants with specific conditions.
What happens to my life insurance if I sell my home and buy a different property?
Your life insurance policy continues unchanged. It’s not tied to a specific property. If your new mortgage is larger, update your cover amount. If it’s smaller, you might reduce coverage to lower premiums.
Does life insurance pay out if I die overseas or from an accident abroad?
Most Australian policies cover worldwide death. But check your policy document. Some exclude death in war zones or from specific activities like BASE jumping. Travel-related exclusions are rare in standard policies.
How long does it take for life insurance to pay out to my family after I die?
Standalone policies typically pay within 7 to 14 days after receiving a valid claim and death certificate. Super-based cover can take 4 to 12 weeks. Complex claims involving investigations may take longer.
If my partner and I both have mortgages before marriage, should we combine our life insurance?
No. Keep separate policies covering your individual needs. If you buy a joint property together, calculate the combined coverage needed. Two separate policies offer better protection than one joint policy, which only pays once.
