Mortgage Protection Insurance | Do You Need It?
Mortgage Protection Insurance ads will flood your mailbox when you buy a new home.
Many insurance companies claim they’ll pay off your mortgage if you die. Others say they’ll pay your house payments for a while if you get injured and can’t work.
Are these offers for real? Do you need mortgage protection insurance, or is there a better way to protect your real estate investment?
IN THIS ARTICLE:
What Is Mortgage Protection Insurance?
Mortgage Protection Insurance (MPI) does what it says: The policy could pay off your mortgage if you die with a balance on your loan.
Or, MPI coverage could make your house payments for a couple of years while you recover from an injury.
As with any insurance policy, you’d be entering a contract:
- Your Responsibility: You would buy a policy and agree to keep its premiums paid month after month, year after year.
- Your Insurance’s Responsibility: Your insurance company would pay off your house if you died with a balance remaining on your mortgage, and assuming your death met the claims requirements set up in your policy’s fine print.
On the surface, this kind of coverage seems like a solid idea. It’s natural to want a legacy of stability for your family if you died.
Taking out a new mortgage feels risky to a lot of new homeowners for a good reason: You’re going into debt for decades while making one of the biggest investments you’ll ever make. Mortgage Protection Insurance can help calm your anxiety.
Is Mortgage Protection Insurance a Good Idea?
Mortgage Protection Insurance is not a scam. An MPI policy can give you peace of mind when going hundreds of thousands of dollars into debt to buy a home.
But there’s a more important question that you probably want to know:
Is it a good idea, financially, to buy Mortgage Protection Insurance?
For many people — especially millennials — the answer is no.
- Mortgage Protection Insurance is Guaranteed Issue:
Guaranteed Issue policies cost more because insurers don’t know much about you, the policyholder. Are you in poor health and more likely to die before paying off your home? Your insurance company doesn’t know, so it charges higher rates just in case. When you’re young and healthy, as many millennials tend to be, you can find a better deal with medically underwritten term life insurance.
- MPI Premiums are Level but Benefits Diminish:
This is a big deal for me. With MPI, you’ll pay level premiums, which means your payments won’t change over the life of your policy. This is normally a good thing. But with MPI, your benefit diminishes over the life of the policy. Each time you make a house payment, lowering your mortgage principal, your insurance company has less on the line. Shouldn’t your premiums get lower? They don’t.
- Mortgage Protection Insurance Pays Your Lender
Your MPI policy would pay off the balance of your home loan to your lender if you died. Traditional life insurance will pay your beneficiary, the person you chose to benefit from your policy. Your life insurance beneficiary could use the money as needed — not just to pay off the mortgage.
Alternatives to Mortgage Protection Insurance
If you’ve just bought or refinanced a home and want some financial protection from the unexpected, consider a term life insurance policy instead.
If you’re relatively young — mid-40s or younger — you should be able to find enough term life coverage to pay off your mortgage if necessary. Buying up to $2 million in coverage has become more normal in recent years.
If you’re healthy, you can get covered for less money than you’d spend on Mortgage Protection Insurance — and you could get coverage quickly with an online agency like Haven Life or Bestow Life Insurance.
Advantages of Term Life Insurance vs. MPI
Compared to MPI, term life can offer more flexibility and value:
- Level Benefits: With term life, your premiums do not change during your term, whether it is 10, 20, or even 30 years. Your death benefit also remains level throughout the term. Your benefit is not tied to your mortgage balance.
- Flexible Use of Money: If you paid off your home or even paid its balance down significantly, your beneficiary would still receive the full term life death benefit to use as he or she needs. Your mortgage balance would not limit the payout.
- Rates Favor the Young & Healthy: Millennials can qualify for some of the best term life rates on the market because medically underwritten term life insurance is cheaper for the youngest and healthiest shoppers.
What About Disability Mortgage Protection Insurance?
Term life offers younger and healthier shoppers a better alternative than Mortgage Protection Insurance for protecting the mortgage if you died unexpectedly.
But what about disabilities? Term life insurance could not help if you became disabled but didn’t pass away.
You could get an accelerated death benefit rider added to your term life policy. With this rider in place, you can access part of your policy’s death benefit early — before you died — if you were diagnosed with a terminal condition. This early access could help solve some financial problems.
A better idea: Buy a long-term disability insurance policy. This kind of coverage would pay you, the policyholder, not your lender, a percentage of your annual salary if you became disabled and couldn’t work.
You could use the money to keep the mortgage current or for other needs. Just like term life, your long-term disability insurance policy wouldn’t be connected to your mortgage balance.
Who Should Get Mortgage Protection Insurance?
For many people, especially millennials, Mortgage Protection Insurance is not the best way to protect the investment you’re making in your new home.
For some shoppers, though, Mortgage Protection Insurance does offer an ideal solution.
If you’re not in the best of health, or if you have a chronic health condition such as diabetes or COPD, term life insurance will cost a lot more, or underwriters may deny your application entirely.
Your health may prevent you from getting a new long-term disability policy, too.
If you find yourself in this situation, give Mortgage Protection Insurance a closer look. MPI typically offers guaranteed issue or simplified issue insurance, which means your health shouldn’t automatically disqualify you.
Does Mortgage Insurance Pay Off My House If I Die?
If you died, your policy could pay your lender the amount due on your home, whether you have one more payment or 359 more payments due.
If you’re interested in this kind of coverage because you can’t find a better deal with term life or long-term disability coverage, be sure you’re taking ownership of the shopping process. As I said up top, you’ll get constant offers from insurance companies as soon as you close on your home or finalize a second mortgage (or even a Home Equity Line of Credit).
Don’t jump at one of the first offers, even if you like the payments. Instead, look into policy details. For example, some Mortgage Protection Insurance policies will pay off your home only if you died in an accident. They wouldn’t pay off your home if you died from an illness.
What Other Exclusions Apply?
Suicide as a cause of death is a common exclusion, but you’ll need to find out what other limits your policy places on your benefits before signing the contract.
Some policies charge higher premiums for people in dangerous jobs. If you’re a roofer or a construction worker, for example, you may face higher rates from some carriers.
Mortgage Protection Insurance vs. Private Mortgage Insurance
For obvious reasons, lots of people confuse Private Mortgage Insurance (PMI) with Mortgage Protection Insurance (MPI).
Your lender will likely require you to buy Private Mortgage Insurance unless you’re putting 20 percent down on a conventional loan.
But Private Mortgage Insurance doesn’t help you. Instead, PMI protects your lender in case you default on the loan while you still owe more than 80 percent of your home’s original purchase price.
When you get your mortgage balance paid down to 80 percent of your home’s original purchase price, be sure you cancel your PMI. Your lender may not cancel it right away.
Either way, PMI, unlike MPI, will not help you or your family if you died or became disabled while still owing money on your home.
Life Insurance Is A Better Way to Protect Your Mortgage and More
If you’re relatively healthy, term life insurance can offer a more affordable way to protect your mortgage investment than MPI.
And, a life insurance payout can be used in any way your beneficiary wants. If the house payment isn’t a problem for your partner, he or she could save the insurance payout for your kids’ college or save for retirement.
Long-term disability offers a similar element of financial freedom when compared to MPI. With disability coverage, you would benefit from the policy’s payouts if you experienced a disability and couldn’t earn income from work, not your lender.
Here’s the bottom line: Use a life insurance policy to protect your mortgage if you, like many millennials, can qualify for solid coverage at a great price.
If you can’t qualify for good life insurance rates, consider those Mortgage Protection Insurance offers. They’ll keep coming in the mail for a few months. Just read them closely and so some shopping of your own before signing the contract.