Mortgage life insurance, also called mortgage protection insurance (MPI) guarantees your mortgage will be paid back in the event of your death.
Like taxes, death is a certainty we’ll all face, and it’s one you should think about when buying 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 it actually a good investment?
We’ll answer this question below and present you with a few alternatives that could be better options for protecting your family.
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How Does Mortgage Life Insurance Work?
An MPI policy is based on the current amount of your mortgage and will pay your mortgage balance if you die before the term is up.
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 mortgage life insurance, 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 receiving the benefit.
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.
What Is Private Mortgage Insurance?
The law does not require homeowners to purchase mortgage life insurance; however, it may require private mortgage insurance (PMI), which is often confused with mortgage life insurance.
In reality, the two 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 premiums, however, will depend on the mortgage amount and other factors, like where you get your policy.
Is Mortgage Life Insurance Right For You?
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: MPI grants you peace of mind in 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.
- Approval: A medical exam is not usually required for MPI, so it may be the perfect option for those previously denied traditional life insurance due to medical conditions or age.
Mortgage life insurance is primarily beneficial to those who would not be approved for a traditional life insurance policy due to age or health.
To decide whether MPI is right for you, you need to take a look at your overall financial situation and coverage needs, as well as other risk factors like medical conditions.
What’s the Downside of 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 are the drawbacks of putting all your premiums toward mortgage life insurance:
- Payout: While your mortgage will be accounted for, none of your dependents’ other financial needs will be taken care of.
- 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 no matter what you owe.
- 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 looking for initial quotes.
- Payment structure: If for some reason you fall behind on mortgage payments, the insurance value will often remain on its original schedule, so it won’t adjust to any new or outstanding debt.
- Cost: MPI becomes significantly more expensive the further you are into repaying your mortgage.
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.
How Do You Apply For Mortgage Life Insurance?
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.
You might also be encouraged by your insurance company to bundle MPI 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, or others types of insurance.
We suggest this type of policy only if you find yourself unable to qualify for term life insurance should you consider MPI.
If MPI is the best type of coverage you can obtain due to your health or 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 policy options.
- 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.
What Are Some 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 benefits can also be applied as your family sees fit.
Rather than benefits being paid to a bank or lender, your loved ones are the beneficiaries and can use the policy any way they choose, like paying the mortgage, going to college, or settling debts.
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 those needs.
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.