What insurances are you thinking about as a buyer?

So you’re on the road to buying a home (hooray!) and you’re hearing rumbles about insurance. You might have questions, like – do I even need insurance, what kind of insurances are available to me, and is there anything that’s absolutely mandatory? Let’s unpack the insurance basics for home buyers. 

Who *has* to take out insurance?

Typically anyone buying a house and borrowing the money to do so will be required by the lender to take out what’s termed home or building insurance. You may not need this when buying an apartment, as the insurance could be held by the strata or body corporate (and the cost included in your levies). 

Before you go through the application process with any lender, be sure to ask your broker what the lender might expect you to be covered for. 

Is insurance right for you? 

There are a variety of insurance products out there to cover you should something out of the ordinary happen. Some people pick and choose the type and level of cover that’s right for them – to use a motor insurance as an example, a person might buy a low-value used car and decide to only take out third party cover rather than going full comprehensive. 

But given you’re in a property frame of mind – which is the biggest purchase most of us humans will ever make – the value in taking out cover for a variety of purposes could far outweigh the temptation to wing it should things go pear shaped. (Read on for more on this.) 

What are the classic insurance players?

Home or building insurance

This is typically for houses only, and covers you for damage to the bones of the building and permanent fixtures like fitted kitchens and sheds. Damage, may be caused by things like floods, fires, falling trees or even vandalism. 

When figuring out how much to cover yourself for, you’re calculating repairs to or replacement of the structures only, not the actual land value. 

Contents insurance

If you’re a renter you may have this cover already. It’s for damage to and loss of your belongings like furniture, electrical equipment and jewellery, and can also be taken out to help protect you when moving from A to B. 

Landlords insurance

This is extra to a standard home or contents policy and covers things like loss of rent, damage caused by tenants, and legal liability. Many investors look to this as a buffer from issues well beyond their control and protect their money-making potential. 

Understanding lender's insurance (LMI)

Now to Lenders Mortgage Insurance (LMI), which isn’t optional in some circumstances. 

To put it simply, LMI isn’t there to protect you, but rather to protect the lender in case you default on the loan. For example, if you take on the debt and find you’re unable to pay it back, the lender may be able to repossess and sell your property. LMI will cover any shortfall between the amount you owe the lender and the sale proceeds the lender receives. The insurer may then seek to recoup that shortfall of funds from you. 

LMI comes into play when the bank is assessing your home loan application and deposit amount. To avoid paying it, the amount you need to borrow (including meeting costs) generally needs to be no more than 80% of the property’s value. 

Some lenders are able to lend to you with a deposit of 15% or even less, though LMI is likely to be charged. You might also want to look into whether you might be eligible for any housing schemes for first home and low income buyers where LMI is waived. 

Talk to your broker or lender to find out more. 

How can borrowers protect themselves? 

While LMI might protect the lender if you can’t make repayments and default on your loan, what might protect you? While you may be covered for certain elements like the building needing work (under building insurance) and damaged belongings (under contents insurance), life insurance might be an option to consider should your body hit a roadblock.

You may already have some level of cover in your superannuation, but when taking on a home loan, it pays to know your situation and crunch the numbers on the amount of cover you may need in case you suffer a serious illness or injury and your ability to meet your financial obligations (including your home loan repayments) is impacted. 

While you can never predict the future, knowing there’s a backup in the wings can provide peace of mind. 

Is the amount of your life cover in your super enough?

Financial research firm, Rice Warner, estimates that the median default life insurance cover within super meets approximately 65% to 70% of the basic cover needs of average households. For households with dependent children, that estimate is much lower¹. Rice Warner estimate a family with an annual combined income of $80,000 is likely to need over $500,000 in life cover to meet minimum needs².

Remember to read the small print

We’ve talked a lot here about the types of insurances that may be available to you. As with any big financial decision, it’s important to read the small print so you can get a gauge on whether it suits your needs and to understand any exclusions to cover.

We are happy to provide you with this general information. You can visit the government’s Moneysmart to learn more about insurance, or if you need advice specific to your circumstances, you should speak to a financial advisor.
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You can also read real stories about people who have taken out life insurance and how their benefits helped them to manage their finances when life took an unexpected turn.