In addition to paying off a mortgage after the death of an insured borrower, some policies protect against a disability interfering with mortgage payments. In other words, if you can’t earn an income, your insurance company can make monthly mortgage payments for you.
How Mortgage Protection Insurance Works
A home loan might be one of the biggest financial commitments you ever take on. Leaving that responsibility to your loved ones when you pass away can put a large financial burden on them. If your family can’t keep making payments, they may need to sell the home or face foreclosure. But with insurance products such as MPI, you can shift some of that risk to an insurance company. MPI is similar to other types of life insurance. You apply for a policy and if approved, pay premiums to secure coverage. However, unlike standard life insurance policies, you might not need to qualify for coverage with a medical exam and detailed questionnaires. Some applications may ask limited health questions or none at all, which could make this type of coverage an option if you have a risky occupation or existing health conditions. MPI coverage is closely tied to your home loan. The death benefit matches the loan balance, and in many cases, your lender is the policy’s beneficiary. As a result, beneficiaries don’t receive money directly and don’t need to forward funds to the lender. There is typically no extra money left over after paying off the mortgage. For example, assume you get a home loan for $240,000. An MPI policy would have an initial death benefit of $240,000, which completely pays off the home loan if you die. Over time, as you pay down your loan balance with monthly payments, you’ll owe less. For example, you might owe only $210,000 after several years. If you die at that point, the policy would pay your lender $210,000 (not the initial $240,000).
Alternatives to Mortgage Protection Insurance
If you need life insurance, it could make sense to buy a large policy that covers several needs—including the mortgage—and is paid directly to you. For example, you might buy a policy with a death benefit that is sufficient to:
Pay off the mortgageReplace a wage earner’s income for many yearsFund education expenses for childrenCover final expenses like burial and memorial costsPay medical bills
Individual Term or Permanent Life Insurance
With individual term or permanent life insurance policies, you can get the amount of coverage you need, without it declining over time. The amount you need depends on your goals and circumstances, and it’s wise to discuss your situation with an insurance agent or a financial planner as you make this decision. A basic term life insurance policy, which offers coverage for a specific number of years, might be a decent alternative to MPI. For example, if you have a 30-year mortgage, a 30-year term policy might be appropriate. Plus, the death benefit won’t decline over time like it will in most MPI policies.
Employer-Provided Coverage
Life insurance from your employer might also be helpful in reducing financial strain after a death. However, that insurance is tied to your job. If you stop working, you could lose coverage, and buying a new policy could be difficult, especially if you have health issues.
MPI vs. PMI and MIP
MPI is easy to confuse with other mortgage-related terms.
MPI: Mortgage protection insurance is life insurance that pays off a home loan (and might cover payments during periods of disability).PMI: Private mortgage insurance protects your lender—not you—if you default on your home loan. This is typically a required monthly expense you pay when your down payment is less than 20%.MIP: A mortgage insurance premium is required for FHA loans. This consists of an upfront premium and a monthly cost that helps fund FHA programs.
Pros and Cons of Mortgage Protection Insurance
Pros Explained
Potentially easy to qualify for: MPI is often a form of guaranteed issue or simplified issue life insurance. In other words, insurers may not require a medical exam with blood and urine samples, and they do not have lengthy questionnaires that ask about your health. If you have significant health issues or a risky job, you may find it easier to qualify for coverage. Simple way to eliminate mortgage at death: Since MPI is linked to your home loan, it’s an easy way to help loved ones after your death. The policy amount is sufficient to pay off your home loan, and the death benefit goes directly to the lender. As a result, eliminating the mortgage becomes relatively effortless for family members during a difficult time.
Cons Explained
Payment goes directly to your lender: Your loved ones may need money for various needs when a family member dies, but with MPI, the benefit goes directly to your lender. It may be best to get a policy with broader coverage than MPI that can help with income replacement, medical bills, and other needs—not just the mortgage. May be more expensive than policies with a medical review: An insurance policy that includes a medical review is often more affordable than MPI, especially if you’re healthy. Plus, some guaranteed issue policies may only provide a benefit for accidental death and not for deaths from natural causes. Shrinking value: The premiums you pay for MPI might seem worth the benefit at the beginning of a policy when the loan balance is the biggest. After that, the death benefit shrinks with the loan balance—but premiums might stay the same. In contrast, with a standard term life insurance policy, you pay level premiums, and the death benefit does not change.
