Mortgage Protection Insurance: Everything You Need To Know
As a homeowner, one of the scariest scenarios you can face is foreclosure! If you're the breadwinner of your home, it's important to have a plan in place, in case anything happens to you. That way, you ensure that your loved ones will always have a home even long after you're gone.
Introducing mortgage protection insurance, a type of insurance that shoulders your mortgage balance in the event that you die before completing payments. In this guide, we'll be covering everything you need to know about this unique type of insurance. Read on to find out whether mortgage protection life insurance is right for you.
What Is Mortgage Protection Insurance?
Mortgage protection insurance (MPI) is a type of life insurance policy similar to term life insurance. It provides you with coverage for a set amount of time (called a term) in exchange for regular payments called premiums. If you pass away within the term, your dependents will receive a death benefit.
However, MPI is distinct from term life policies in some key ways:
The death benefit goes directly to the mortgage company: With most life insurance policies, policyholders can assign relatives and loved ones as their beneficiaries; who will receive the payout as a lump sum or an annuity when the policyholder passes.
The cash benefit usually changes over time: There are three ways your death benefit can be structured in an MPI policy: decreasing, mortgage principal, and level.
With a decreasing structure, the payout remains fixed for the first few years, then eventually decreases to match your remaining mortgage payments. This usually happens after five or so years of payment.
With the mortgage principal structure, the policy reflects the rate at which you pay off your mortgage, even if it’s faster or slower than expected. Finally, with a level structure, your benefit will stay the same throughout your term regardless of your actual balance.
The term is locked in with your mortgage: In most cases, life insurance companies will only offer you a term length that matches the length of your mortgage. So, if you have a 30-year mortgage, your MPI coverage will last that long too.
Your policy is a guaranteed issue: This means that you won't have to take a medical exam to qualify for mortgage insurance.
You may be covered for job loss or disability: Some mortgage protection insurance policies cover mortgage payments in case you become disabled or lose your job. Typically, MPI policies with this kind of provision will only cover payments for up to one or two years, or until you can get back on your feet financially. There is usually a mandatory waiting period before the insurance company can provide you with the payments.
Mortgage Protection Insurance (MPI) vs Private Mortgage Insurance (PMI) vs Mortgage Insurance Premium (MIP)
It's important to note that MPI is different from PMI and MIP, despite having similar names.
Mortgage protection insurance protects you, the homeowner, in case you die before you complete your payments. On the other hand, private mortgage insurance is designed to protect your mortgage company or lender in case you default on your mortgage loan. As stated in Business Insider, PMI is mandatory if you don’t have at least 20% in down payment. Finally, MIP is a type of insurance you use when you get an FHA loan and your down is less than 20%.
The Pros And Cons Of Mortgage Protection Insurance
Some believe that a mortgage life insurance policy isn't the most practical choice for long-term financial planning. So, let's take a look at the pros and cons of a mortgage insurance policy:
It's straightforward and convenient: The life insurance coverage you get with an MPI is exactly the amount you'll need to pay off the mortgage balance. Your family doesn’t have to worry about budgeting the funds or even making the payment themselves. The insurance company sends the mortgage payment directly to your mortgage lender.
It's a guaranteed issue policy: For most types of insurance, there are two primary factors that affect the cost of premiums: age and health. Life insurance companies see older and "unhealthier" clients as high risk.
To mitigate risks and cut their losses, they usually require their applicants to undergo a medical exam to make sure they're in good health. If you have an underlying medical condition, such as diabetes or heart disease, your life insurance may become much more expensive.
But with mortgage insurance, rates aren't dictated by the client's health. In fact, applicants don't have to take a medical exam at all to qualify. This means that people in poor health can still qualify for an MPI.
It could provide job loss and/or disability insurance: Depending on your insurance provider, your MPI could provide coverage if ever you become disabled, lose your job, or otherwise aren't able to pay off your lender. Just keep in mind that coverage will likely only last for a few years, or at least until you can bounce back financially.
It's not a flexible policy: With other kinds of insurance, such as term life insurance or whole life insurance, policyholders get to assign their dependents. In most cases, these beneficiaries have the freedom to use the money however they need to, whether for funeral expenses, personal loans, or something else entirely.
An MPI won't give your beneficiaries that choice, as the payout goes directly to your mortgage lender. The money can only be used to pay off mortgages. And while it's good to have your mortgage balance covered, it doesn't leave any room for emergencies and unforeseen circumstances.
The benefit decreases over time: Unlike with your typical term life insurance policy where the payout remains fixed until the term's expiry, with an MP, it is expected to decrease along with your mortgage balance. However, even as the benefit adjusts to the balance, you still have to pay the same premiums.
It's more expensive than most policies: Typically, guaranteed issue policies like MPI are more expensive than those that require medical exams. This is because life insurance companies would be taking a much bigger risk by signing on someone whose medical status is unknown.
Are There Better Options?
Mortgage life insurance is, at best, a convenient policy that can be a good option for folks who have a poor medical history or are employed in high-risk jobs. However, there are downsides: this life insurance policy is inflexible and its benefits decrease over time.
As such, you may want to consider other options to protect your family. Here are some alternatives:
Term Life Insurance
Life insurance comes in many forms – whole, universal, variable, final expense, etc. Term is the best life insurance for anyone who needs temporary coverage at a low cost.
With term life insurance, you can dictate the length of your term and who receives the payout when you pass. Since your family will have the freedom to do what they want with the money, they can choose to pay for more immediate concerns, such as unpaid personal loans, credit cards, and the like.
Another great thing about the term life insurance policy is that the cash benefit usually stays level throughout the lifetime of the term. This means that you pay the same amount of money for the same amount of coverage until the term's end. Finally, term insurance is one of the cheapest life insurance products out there – most premiums are 6 to 10 times cheaper than whole life insurance.
Investing In A Retirement Fund
If you're looking for something more long-term, you can also try investing in a 401(k) or an IRA. When you die, the funds in either account will go straight to your named beneficiaries, who can then use the money to pay for the balance on your home. Like with term life insurance, your beneficiaries can use the money for other purposes as well, such as paying off credit cards or other debts.
There are some downsides to this option, however. You have to start planning for your retirement fund early so that you have enough money tucked away to actually cover for your house loan when you die. If you die too soon, you may not have enough to protect your family from losing their home.
Is Mortgage Protection Insurance Worth It?
In certain circumstances, MPI can be the most practical insurance policy available.
Mortgage protection insurance really helps if you know your family can't shoulder your mortgage in your absence – it’s especially helpful if you have medical issues that may hinder your chances of getting a better kind of life insurance. However, it comes at a cost – high premiums, decreasing coverage, and a rigid policy that doesn't let your family take control of where the money goes.
Want more information on other useful insurance tools and banking products? Looking for more tips on the best life insurance companies and policies for you? Need help choosing a lender? At Wesley Insurance, LLC, our consultants can guide you through the ins and outs of investing, financial planning, and more. Contact us and book a consultation today.