What Is Mortgage Life Insurance

Mortgage life insurance, sometimes called mortgage protection insurance (MPI), is a life insurance policy that will pay the balance of your mortgage if you die.

This type of life insurance policy usually has no other purpose as it’s intended solely to protect your family members from having to pay your mortgage after your death. Money from the policy will not be paid to family members. Instead, it will be paid directly to your mortgage lender.

Because MPI is designed to step in and cover mortgage expenses, it’s a term policy that ends when your mortgage is paid in full.

Using a Life Insurance Death Benefit

When purchasing life insurance, customers select plans based on the amount they want to leave behind for their heirs through their death benefit. Death benefits allow deceased relatives to pass this money on tax-free in one lump sum, giving their families crucial financial support as they continue life without them.

However, your estate also becomes responsible for any debts you leave behind at death and must absorb these outstanding loans before distributing assets and benefits according to your will. With this in mind, some people purchase specialized coverage known as mortgage protection insurance (MPI). These policies explicitly focus on paying back mortgage debts and other associated costs after a borrower dies.

How Does Mortgage Life Insurance Work?

MPI term lengths will follow your mortgage timeline and only distribute benefits if you pass away before paying off your loan.

Eligibility

In order to gain eligibility for MPI you must meet the following criteria:

Age: Most insurance companies have a minimum and maximum age requirement for mortgage life insurance. Typically, you must be between 18 and 65 years old to be eligible.
Mortgage amount: There is often a maximum limit on the mortgage amount that can be covered by the insurance policy. The maximum coverage amount can vary among insurers.
Health status: You may be required to provide information about your health and undergo a medical examination or answer health-related questions as part of the application process. The insurer will assess your health to determine your eligibility and premium rates. Some policies may have simplified underwriting, which means no medical exam is required.
Occupation and lifestyle: Certain high-risk occupations or hazardous hobbies may affect your eligibility or premiums. Insurance providers may inquire about your occupation and lifestyle habits to assess the level of risk involved.
Mortgage type: Mortgage life insurance is typically available for different types of mortgages, such as residential mortgages, buy-to-let mortgages, or second mortgages. The specific type of mortgage you have may impact your eligibility for coverage.
Citizenship and residency: Insurance providers may have specific requirements regarding citizenship and residency. You may need to be a citizen or permanent resident of the country where you are applying for mortgage life insurance.

What Kind Of Insurance Is MPI?

MPI is a term life insurance policy which means that it’s in effect for a certain period of time, after which, it ends with no benefits or further obligations. Because it’s tied directly to your mortgage, the term of the policy is the length of your mortgage. Since most mortgages are 15 or 30 years in length, those are also common term lengths for MPI. If you pay off your mortgage (even if you pay it off early), then the policy ends.

MPI is often sold by a mortgage lender, but it can come from outside companies. It almost never requires a medical exam, and it may include co-borrowers. In a co-borrower situation, for example, a husband and wife, if the husband dies the insurance continues to cover the wife and pays out if she passes away.

If only one person is taking out a loan, the MPI will list only one homeowner on the policy. If the homeowner dies, then the policy will pay the mortgage lender directly for the balance of the mortgage and possibly some additional fees that are associated with the mortgage. Some MPI policies include disability riders, which means part or all of the mortgage will be paid if the homeowner is disabled.

Who Receives The Death Benefit of MPI?

Instead of paying out to your family directly, your MPI death benefit would go straight to your mortgage lender. MPI death benefits adjust monthly to reflect your remaining loan balance. The longer you live and continue paying down your mortgage, the lower the death benefit.

MPI simplifies your family’s ability to manage your estate and guarantees security after your income contributions disappear. With MPI in place, your relatives would not have to worry about lenders foreclosing on the family home. If you continue living but become disabled and permanently unable to generate income, an MPI policy with a supplemental disability rider would also pay off your mortgage.

How Does MPI Work For A Single Homeowner?

How Does a Disability Rider Work on MPI?

Whereas conventional disability benefits act as a primary source of income replacement, mortgage disability insurance only pays enough to cover your monthly mortgage bill. Insurers often provide this coverage through optional MPI policy riders, though some companies also sell standalone mortgage disability plans.

Typically, mortgage disability insurance only covers your loan’s principal and interest charges. However, costlier MPI riders can help pay for other mortgage-related expenses such as property taxes, home insurance premiums, and HOA fees. If you are in poor health, work a high-risk job, and still have a sizable balance on your mortgage, adding a disability rider to your MPI could prove advantageous.

How MPI Differs From Other Kinds of Insurance

MPI is designed to protect your family from the added burden of mortgage payments after your death. This is a good way to help protect the financial security of your loved ones, but it’s not the only option. You may find that one of the following life insurance plans better suits the needs of your dependents. It could also be that you need more than one type of insurance in regard to your mortgage.

Standard Term Life Insurance

MPI is a type of term life insurance, but a standard term policy might be a better option. Often, term life insurance has a scheduled termination date. You can select a term policy that ends at the same time your mortgage ends and covers an amount necessary to pay off your mortgage.

The big difference is that if you die with an MPI policy the benefits will be paid directly to the mortgage lender to cover the remaining balance. On the other hand, with a standard term life insurance policy the benefits will be paid to your beneficiary and won’t decrease over the life of the policy, which means they might end up receiving considerably more than the balance on the mortgage.

One of the benefits of being able to assign the proceeds to a beneficiary is that they get to decide where the money goes. It could be that the mortgage isn’t a big problem but there is another debt that’s a financial burden and paying that off would be more beneficial.

You might also find that term life insurance has less expensive premiums especially if you’re in good health and young. If you’re in failing health, don’t want to have a physical, and are older, then MPI might be the better option.

Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is very different than MPI, which sometimes leads to confusion. If you don’t have a 20% down payment on the purchase of your home, your mortgage lender may require you to buy PMI. This is a policy designed to protect the lender if you default on the loan or can’t finish the payments.

PMI is not an insurance that offers you any benefits. Rather, it’s designed for your lender’s sake, but you’ll still have to pay the premiums.

Mortgage Insurance Premium (MIP)

Mortgage Insurance Premium (MIP) is more akin to PMI than it is MPI. Mortgage Insurance Premium is another insurance policy that’s designed to protect the mortgage lender, not the borrower. While traditional mortgage brokers use PMI as their security if the borrower defaults, FHA-backed lenders use MIP for protection.

FHA loans help new homeowners make a home purchase with a very low down payment and sometimes they also have low credit scores. This puts the lender in a risky position, so they use a MIP policy in case the borrower stops making their mortgage payments. This is a policy that benefits the lender only, doesn’t pay out any death benefits, and the premium payments are the homeowner’s responsibility.

Homeowners Insurance

Homeowners insurance is a form of property insurance, not life insurance. If you have a mortgage, your lender will require homeowners insurance so they know the property they’re invested in is protected from catastrophic damage.

Most homeowners also want this type of insurance, so they have peace of mind in the case of loss to their home, furnishings, and other assets inside the home and on their property.

There is no payout on homeowners insurance if the policyholder dies. Its purpose is to help the policyholder recover from losses to their property.

How Much Does MPI Cost?

Your MPI monthly premium costs will ultimately depend on your mortgage balance, age and loan duration. Older people with higher loan balances tend to pay the most for MPI because insurers see them as the least likely to catch up on their mortgage before passing away.

According to the VA life insurance calculator, average MPI rates for a 30-year-old seeking coverage on a 25-year, $500,000 mortgage would fall close to $49 per month. Monthly MPI premiums for the same mortgage balance and term would cost around $107 for a 40-year-old, $270 for a 50-year-old, and $705 for a 60-year-old. Carriers may adjust premiums to reflect your diminishing death benefit as you continue to pay down your loan.

Should You Consider Mortgage Life Insurance?

Before deciding if you should take out mortgage life insurance, you should consider standard term life insurance. For some, term life is a much better option, with lower premiums, a higher payout, and more flexibility.

If you don’t qualify for term life but want to protect your family from the burden of a mortgage, the low amount of eligibility considerations for MPI makes it a good option.

If you’re still not certain if MPI is right for you or if you should consider a term life policy, look at the price of premiums to determine which one is most affordable, and which one offers the best value.

Advantages of Mortgage Protection Insurance

This type of policy is very attractive if the homeowner is in failing health or feels they wouldn’t be granted a different type of life insurance. Because there is usually no physical, almost everyone is guaranteed coverage.

Another feature of MPI is that it goes directly to the mortgage lender, and no one has to worry about how to disperse the funds. The mortgage simply becomes a non-factor upon your death and the home is owned outright by your dependents.

Some MPI policies also have disability and job loss protection. The MPI will cover mortgage payments permanently or for a limited time while you recover from a disability or if you lose your job and are looking for a new one. Each policy is different and if this matters to you, it’s worth looking into.

Disadvantages of Mortgage Protection Insurance

There are some downsides to MPI. The biggest one is that there isn’t much flexibility. It’s designed to pay off the insurance and that’s it; there’s no extra money for your dependents.

This also means that the longer you hold the policy and make regular payments to your mortgage, the less MPI you will have to pay toward your mortgage. Since your mortgage decreases every time you make a payment, MPI has decreasing value.

MPI can also be more expensive than a term policy, especially if the policyholder is young and healthy. If this is the case, taking out a term policy is usually a better option with more flexibility, paying directly to beneficiaries, and lower premiums.

Some MPI plans have restrictive age limits, such as not letting people over 45 take out a 30-year MPI even if they have a 30-year mortgage.

How To Get Mortgage Protection Insurance

If you think you could benefit from MPI, follow these steps to secure appropriate coverage:

Review your mortgage. Crunch some numbers and determine your likelihood of leaving a large mortgage debt behind.
Consult outside specialists. Estate planning and insurance planning can become overwhelming. Talk to a financial advisor or independent life insurance expert for insights to help place you on the right path.
Compare and choose coverage. Shop for MPI through your mortgage lender, private insurance companies, or a life insurance carrier. Compare quotes between at least three policies before settling on a plan. Your mortgage broker may have preexisting relationships with specific companies that could result in discounted rates. Consider adding a disability rider if you work a high-risk job.
Enroll in coverage and await approval. Apply for insurance through your provider’s website or by phone. If approved, you will receive a welcome packet with your insurance documents in the mail. MPI coverage will begin as soon as you pay your first premium.

Putting It All Together

Debt does not go away after we die. By purchasing mortgage protection life insurance, you can simplify estate management for your heirs and ensure your family home does not get foreclosed. In the event that you pass away before paying off your mortgage, MPI will cover the remaining balance in full.

Unlike conventional term life insurance, MPI does not require extensive medical underwriting or exams to qualify for coverage, making it a viable investment strategy for people with preexisting health conditions. Talk to a trusted insurance agent to learn more about mortgage life insurance and how it might benefit you and your family.

Mortgage Life Insurance: Protecting Your Home and Loved Ones