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.
How Does Mortgage Protection Insurance Work?
If you’re purchasing a home, mortgage life insurance is something you might want to consider to protect your family in the event of your death. While not a required or necessary policy, there are instances in which it would be a wise purchase, such as the presence of health problems, lack of additional life insurance, or when your dependents wouldn’t be able to cover the mortgage in your absence.
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.
Mortgage Life Insurance vs. Other Options
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 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.
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.
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.