Like taxes, death is a certainty we’ll all face, one you should think about when you buy a home.
If you’re worried about what will happen to your spouse if you aren’t around to contribute to mortgage payments, you may be considering mortgage life insurance.
But is MPI actually a good investment?
We’ll answer that question below and present you with a few alternatives that are probably better options for protecting your family.
What Is Mortgage Life Insurance?
Mortgage life insurance, also called mortgage protection insurance (MPI) guarantees your mortgage can be paid back if you die.
Some policies will also pay out if a policyholder is diagnosed with a terminal illness and is not expected to live more than 12 months, or if the policyholder is incapacitated and will never be able to work again.
Mortgage life insurance is a very straightforward type of coverage, functioning similarly to a standard term life insurance policy.
With this type of insurance, you pay premiums to keep the policy in force. If you’re still alive when the term ends, your coverage expires.
The primary difference between MPI and standard life insurance has to do with beneficiaries.
With MPI, your lender is the beneficiary of your policy, meaning they receive the face amount of the policy if you pass away, as opposed to your loved ones.
Unlike most term life policies, mortgage life insurance also comes with a decreasing death benefit.
As your mortgage dwindles, so does the death benefit on the policy.
Since this type of insurance is designed to match your mortgage, it comes in 15 and 30-year terms.
You can often secure shorter term lengths as well, like 5 or 10 years.
Why You Might Want to Consider Mortgage Life Insurance
While mortgage life insurance isn’t the best option for most families (more on that below), it does come with a few notable benefits.
- Comfort: While it isn’t the only type of life insurance capable of granting peace of mind, MPI does allow you to rest assured knowing your loved ones and their home are protected no matter what.
- Simplicity: A mortgage life insurance policy is reserved strictly for paying off your mortgage and deals directly with your lender. Your loved ones won’t have to worry about allocating the death benefit across a number of expenses.
- Approval: If you’re denied traditional life insurance because of your age or medical conditions, mortgage life insurance may be the perfect option for you, since a medical exam is not usually required to purchase this type of plan.
Why You Might Want to Avoid Mortgage Life Insurance
The benefits of mortgage life insurance outlined above sound pretty promising, but don’t run out and buy a policy just yet.
Here’s the downside of putting all your premiums towards mortgage life insurance as opposed to a term life policy.
- Payout: While your mortgage will be accounted for, none of your dependents’ other financial needs will be taken care of. In fact, they won’t actually see a penny of the death benefit as the lender is the beneficiary of the policy.
- Decreasing death benefit: Since the policy’s payout is meant to match the mortgage value, the potential death benefit for this type of insurance decreases over time.
- Premiums: While the face value of your policy decreases with your mortgage, your premium payments do not, so you end up paying the same whether you owe $100,000 or $10,000.
- Policy limitations: Some policies will only cover your mortgage if your death is accidental, excluding a terminal illness diagnosis.
- Refinancing: Some mortgage life insurance policies will not allow you to refinance your home’s mortgage and keep your policy, so it’s important to note this when you are looking for initial quotes.
- Payment structure: If for some reason you fall behind on payments, the insurance value will often remain on its original schedule so that it won’t keep up with any new or outstanding debt.
- Cost: The further you get into repaying your mortgage, MPI becomes significantly more expensive than term life insurance.
Due to the cost, decreasing death benefit, and policy limitations highlighted above, most families find MPI isn’t the best solution for their life insurance needs.
Differences Between PMI and Mortgage Life Insurance
The law does not require mortgage life insurance; however, it may require private mortgage insurance, which is often confused with mortgage life insurance.
In reality, PMI and MPI couldn’t be more different. Private mortgage insurance doesn’t actually protect you as the borrower; instead, it protects the lender.
In the United States, people who put less than 20% down on a home are usually required to have PMI until the mortgage is less than 80% of the value of the home.
If you die or default for whatever reason, the lender does not lose money if they cannot resell your home for the price of the initial mortgage.
PMI is typically about one-half of one percent of the mortgage amount.
Mortgage life insurance costs, however, will depend on the mortgage amount and other factors, like where you get your policy.
Alternatives to Mortgage Life Insurance
Mortgage life insurance isn’t your only option to ensure your loved ones are able to retain ownership of your home.
Depending on your needs, there’s a good chance one of the policy options below makes more sense for your family:
Term Life Insurance
Term life insurance is affordable and comes with far fewer limitations than mortgage life insurance.
With a standard term life insurance policy, the death benefit won’t decrease, allowing you to lock in guaranteed protection.
Term life insurance can also be applied as your family sees fit.
Rather than a bank or lender, your loved ones are the beneficiaries and can use the policy to pay the mortgage, go to college, settle debts, or any other way they choose.
Permanent Life Insurance
While permanent life insurance is more expensive than term life insurance, it can provide the lifelong guarantees some families depend on.
It can also help to account for a mortgage and a whole host of other financial needs your family might encounter.
Whole and universal policies are more complex than term life insurance, coming with a cash value component and a range of investment options.
At any rate, if you have lifelong needs like providing care for a dependent with special needs, permanent life insurance could be a good fit.
Disability and Unemployment Insurance
If you’re concerned at the prospect of being unable to afford your mortgage due to a job loss or disability, there are policies designed to meet the need.
Mortgage disability insurance, for instance, can cover either a portion or the total amount of your mortgage if a disability leaves you unable to make payments.
Likewise, mortgage unemployment insurance can provide mortgage assistance if a job loss renders you incapable of paying your mortgage.
Is Mortgage Life Insurance Right for You?
You may be offered MPI when you sign the paperwork for your initial mortgage or as a supplement when you purchase other types of insurance.
MPI is often promoted as a solution that allows your loved ones to use your life insurance policy freely without having to worry about mortgage payments eating it up.
But the fact is, buying supplementary mortgage insurance is far more expensive than simply increasing the face value of your life insurance policy!
You might also be encouraged by your insurance company to bundle mortgage life insurance with other forms of coverage, such as auto or homeowners at a discounted rate.
However, when you do the math, it rarely makes financial sense to bundle life insurance with home, auto, and others.
To decide whether MPI is right for you, you need to take a look at your overall financial situation, but the general consensus is no.
Mortgage life insurance is primarily beneficial to those who would not be approved for a traditional life insurance policy due to age or health.
How to Get the Best Mortgage Life Insurance
If and only if you meet the criterion above and find yourself unable to qualify for term life insurance should you consider MPI.
If this is the best type of coverage you can obtain due to your health and other risk factors, keep the following tips in mind to secure the best policy possible:
- Compare quotes: Not all policies are created equal, so be sure to look around for the best price and even bundle if you can.
- Compare policy conditions: Make sure you get a policy that is flexible if you would like to refinance your home someday.
- Read the fine print: If the mortgage is only covered in the case of accidental death, you’ll want to pass. Make sure your family will be protected no matter what.
Mortgage life insurance is a straightforward way to ensure your family will have a roof over their heads once you are gone.
It can be a lifesaver for individuals who struggle to get approved for medically underwritten life insurance.
However, in most cases, it isn’t likely to be the most affordable way to secure that protection.
Before you commit to a mortgage life insurance policy, take a few moments to get quotes for traditional life insurance.
You may be surprised at the coverage and rates you qualify for.