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If you're a homeowner who worries about how a loved one will be able to pay the mortgage if something happens to you, you might be considering mortgage protection insurance (MPI). While MPI is an insurance policy that will repay your mortgage lender in full if you pass away, it might not be your best option. Read on to learn more about mortgage protection insurance and some alternatives that might provide more value and peace of mind.
What is mortgage protection insurance?
Mortgage protection insurance is a special type of life insurance coverage. If you owe money on your mortgage and pass away, it pays off the balance. Some policies also temporarily cover part or all of your mortgage payments if you become disabled.
How mortgage protection insurance works
Mortgage protection insurance is sold by an insurance company. It's generally available regardless of health status. If you're covered by MPI when you pass away, your policy will repay any remaining balance on your home loan. If your policy includes disability protection and you develop a qualifying disability, the insurance will make your mortgage payment.
Typically, mortgage protection insurance only pays the principal and interest on your mortgage loan. However, your monthly payment may also include tax and insurance payments. A mortgage calculator shows your total payment breakdown. Some policies offer the option to cover these costs too, but you'll pay higher premiums for this option.
Who needs mortgage protection insurance?
Most people should not buy mortgage protection insurance. Instead, they should buy a term life insurance policy. And consider disability insurance as well. There are three reasons for that:
- Term life and disability coverage can be cheaper. You most likely will end up paying lower premiums than you would for MPI.
- The value of mortgage protection insurance declines over time. The policy pays off your mortgage only. And your mortgage balance goes down every month.
- Term life and disability insurance provide more flexibility. Mortgage protection insurance only helps with your mortgage. A term life policy provides a lump-sum payment. Your beneficiaries can use it for whatever they need. And disability insurance provides income you can use as you'd like.
Mortgage protection insurance may make sense if it's the only insurance you qualify for at a reasonable rate.
How much does mortgage protection insurance cost?
The costs of mortgage protection insurance varies. Your age and the size of your mortgage determine your premiums. Policies tend to be more expensive than whole life insurance policies. MPI also isn't available from as many insurers as a term life or disability policy. You'll need to shop around and get quotes from more than one insurance company.
Mortgage protection insurance vs. PMI
Mortgage protection insurance is quite different from private mortgage insurance (PMI).
PMI protects lenders from financial loss in case they foreclose on you. You may be required to buy PMI if you purchase a home with a small down payment -- typically less than 20% of the home's value.
MPI protects you or your loved ones. It ensures your mortgage is paid off if you pass away. Or it enables you to keep making monthly payments if you become disabled. It's optional coverage.
MPI also differs from homeowners insurance. Most lenders require homeowners insurance too. Homeowners insurance protects your home and its contents. It covers financial costs if your home is destroyed or damaged by a covered event.
Do I need mortgage protection insurance?
In most cases, you do not need mortgage protection insurance. If you are concerned about your family's ability to remain in your home should you pass away, look into term life insurance instead. If you are concerned about making payments if disabled, look into disability insurance instead.
If you are unable to get a term life policy or a disability policy but can qualify for mortgage protection insurance at an affordable rate, you may wish to consider it. MPI can take a financial burden away from your loved ones and let them keep on living at home in the event of your disability or death.
Still have questions?
Here are some other questions we've answered:
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FAQs
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Mortgage protection insurance (MPI) is a type of life insurance. It will pay off the remaining balance on your mortgage if you pass away. Some policies also offer disability coverage. That will pay for monthly principal and interest payments if you become disabled.
Most people are better off with term life insurance instead of MPI. Term life insurance is cheaper and can provide a larger and more flexible benefit. It also doesn't decline in value. The value of MPI goes down as your mortgage is paid off since the policy only repays your lender if you die.
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Mortgage protection insurance protects you and your family from losing your home in case of illness or untimely death. It pays off your mortgage if you die while there's still a balance. Or if you have disability coverage, it makes part or all of your mortgage payment if you become disabled. You can choose to buy this coverage if you want this protection.
Private mortgage insurance (PMI) protects your lender from financial loss if you default and the lender forecloses. It does not protect you, although you must pay premiums for it. Your lender may require PMI as a condition of giving you a loan if you make a small down payment, especially if it's under 20% of your home's value.
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Most people should purchase a term life insurance policy instead of mortgage protection insurance. A term life policy can provide a lump-sum payment to beneficiaries if you pass. They can use the money to pay the mortgage and cover other costs. Term life policies are not only more flexible and potentially more generous, they also typically cost less than MPI.
If you can't qualify for a term life policy but can get mortgage protection insurance, consider whether the cost is reasonable for the protection you get. Remember, the value of the policy declines as your mortgage balance drops during payoff.
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Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
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