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.
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:
However, with a mortgage protection insurance policy, your mortgage company or lender becomes your beneficiary. The money goes towards the remaining balance of your mortgage.
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.
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%.
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:
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.
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.
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:
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.
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.
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.