Should You Get Mortgage Protection Insurance?
Mortgage protection insurance can be an attractive option for homeowners looking to protect their investment and keep family members from financial troubles. This type of insurance policy covers your remaining home loan balance if you die.
However, mortgage protection insurance, also known as mortgage life insurance, isn’t right for everyone. Here’s a closer look into what this insurance coverage can do and how to determine whether or not getting such a policy is right for you.
What Is Mortgage Protection Insurance?
If you die before your mortgage is fully paid off, your heir or heirs will need to assume the payments if they want to keep the home. In the event they are unable to meet the payments, the loan will go into default. If it continues to go unpaid, the bank will foreclose and take possession of the property.
Mortgage protection insurance, or MPI, can prevent such an event. If you have this policy, the insurance company will typically pay the lender the remaining mortgage balance after your death. Some MPI policies will also pay out to the lender for a specific period of time if you become unemployed or disabled, so there is no interruption of payments.
“For a homeowner who is concerned about something happening to them and they have dependents, MPI can be beneficial,” says Dianne Crosby, senior vice president of mortgage lending at Guaranteed Rate. “I got MPI for myself after I got divorced because I had three children. I didn’t want to leave them with that burden. It gave me and them an extra layer of protection.”
As the MPI policyholder, you would pay your premiums over a specific term. During that time, you are covered. The benefit from this type of insurance is generally decreasing, meaning the possible payout goes down over time. As you pay off more of your mortgage, there is less loan for your insurance to cover.
Pros and Cons of MPI
While MPI can be beneficial to you and your loved ones, there are also downsides to consider before getting a policy. Here are some pros and cons:
- May not require underwriting. Your ability to get an MPI policy may not hinge on a medical exam or other underwriting procedures.
- Emotional relief for you. You can feel sure that you won’t leave your loved ones in financial distress or at risk of losing the home if you die while still owing money on the mortgage.
- Simple for your heirs. The insurance company typically sends the money directly to the lender, so the family doesn’t have to handle checks, disbursements or payments.
- May not be a good deal. The premium doesn’t change as you make your mortgage payments and pay down the principal, but the death benefit declines as your loan balance decreases.
- Restricted payout. Since the death benefit only goes towards the home loan, MPI won’t help if your loved ones need the money for other expenses related to your passing.
- An extra payment. If you can’t afford another expense, the cost of MPI may be too stressful.
“Lenders like MPI, too, because it lowers the risk of foreclosure,” says Bob Chitrathorn, a certified plan fiduciary advisor and the chief financial officer and vice president of Simplified Wealth Management in Corona, California. “They know the mortgage will be paid off if you pass, and they won’t have to knock on doors to ask for payment. Lenders don’t want to go through the hassle and costs of foreclosing on the home. It takes too much time and money.”
Still, MPI may not be the right choice for you. Be sure to consider all your options.
Alternatives to MPI
MPI is not the only strategy to help your heirs keep the home. Another option is a level term life insurance policy. It’s more flexible than MPI because the money goes directly to your beneficiaries. In contrast, since the MPI death benefit is restricted to your mortgage, it won’t cover your lost wages, funeral costs or other end-of-life expenses.
“A term life insurance policy that incorporates other debts and liabilities might have (a) higher death benefit than one strictly for the mortgage,” says Logan Wease, president of We Insure Things, which sells MPI. “In some cases, it is also less expensive.” However, life insurance policies can be prohibitively expensive if you’re older, have a preexisting illness or lead a dangerous lifestyle, Wease says, while the primary factors in MPI premiums are the amount of the coverage and your age.
“You get more benefits with term insurance, but if you’re just looking to cover the mortgage, MPI is the way to go,” Chitrathorn says. “It can also prevent squabbles. With term life insurance, the money passes to a beneficiary – a brother, sister, a daughter – and it’s up to that person to decide to pay off the house. With MPI, the mortgage gets paid free and clear.”
Another alternative to MPI is building savings and investments. Instead of making premium payments over years that may never pay out, you can save your money and invest it so it grows. If you have amassed enough, it can be sufficient to pass on to your loved ones when you die, so they can either make the payments or pay off the loan.
How MPI Differs From Other Mortgage Insurance Policies
There are a few other common insurance policies associated with homeownership that are distinct from MPI. Here is what they are:
- Homeowners insurance, Homeowners insurance is not required by law, although banks usually require it as a condition of the mortgage. In the event of a disaster, it insures your home and belongings. It also offers personal liability coverage for injuries sustained in your home.
- private mortgage insurance, If you want to buy a home with a conventional loan but can’t put down 20% of the purchase price, PMI is usually required. It will add another expense to your budget, but you can request to cancel it when your loan-to-value ratio reaches 80%. This policy is designed to protect the lender against nonpayment and default.
- Federal Housing Administration mortgage insurance premium. If you buy a home with a loan backed by the FHA, you will owe a 1.75% upfront mortgage insurance premium, which you can pay when you close or add to your loan. After that, you’ll pay an annual premium, usually through your monthly payments. How long you will need MIP depends on your down payment. If you put 10% or more down, you’ll pay for 11 years. Otherwise, you’ll pay MIP for the life of the loan., As with PMI, MIP protects the lender if you fall behind on payments.
Where to Buy MPI
You can purchase an MPI policy from a few different sources. Your lender may offer it, so it’s worth checking there. Life insurance companies and private insurance companies also offer MPI, according to the credit bureau Experian.
When shopping for an MPI policy, try to get quotes from several companies so you can compare premiums and coverage.
Is MPI Ever Required?
Unlike some insurance products that are required when you buy a home, MPI is optional. However, MPI may be worthwhile to obtain under certain circumstances. For example, if you believe that your relatives will have a hard time making the mortgage payments after you die and you don’t want them to handle the money, it can make sense. You may also consider it if you can’t get a term life insurance policy or can only get a higher rate because of your age, health or lifestyle.
It’s not always easy to determine if an MPI policy is a wise decision, so consult with a qualified financial planner. “Also talk to an insurance agent and ask if it will fit into your profile,” says Crosby. “Not all financial planners are well versed in this type of policy. That person should be honest, forthright and experienced.”
After all, insurance coverage only makes sense when it’s affordable and will help you achieve your goals.