Having a mortgage is one of your biggest responsibilities. Falling behind on your mortgage can lead to paying more interest charges, late fees, foreclosure proceedings and even losing your house. Mortgage protection insurance (MPI) is one way to guard your family and investment if the unthinkable happens.
MPI is a type of life insurance that offers a dual benefit to help your family with a mortgage if you die. Similar to a regular life insurance policy, you pay a premium with the understanding that your loved ones will get a death benefit when you die.
“Mortgage protection and life insurance are the same thing just marketed differently,” said Doug Mitchell, owner of Ogletree Financial in Auburn, AL.
The difference is that mortgage insurance is connected to your mortgage. Let’s say a homeowner has 15 years left on a $250,000 mortgage. The person can take out a PMI policy for the life of that mortgage that will help pay off some or all of the mortgage if that person dies.
Best Life Insurance Offers For You
“What the mortgage protection insurance does is offer you an option to have payments available so that you won’t default or foreclose on the mortgage,” said Jordan Shanbrom, a life insurance broker with California Life Coverage.
- Mortgage protection insurance (MPI) is a type of life insurance policy that offers dual benefits and helps the family with a mortgage if you die.
- If you have mortgage insurance, it will help you pay a portion or all your mortgage in case you to die.
- Some insurance companies will let you turn the mortgage insurance into a life insurance policy, while some providers also let you add riders to help with living benefits.
- If you’re a senior citizen or have a medical condition like heart problem and cancer, you may be prevented from getting a mortgage insurance policy.
What does mortgage insurance cover?
Mortgage insurance helps pay a portion or all of your mortgage if you were to die. Depending on the policy, mortgage insurance may pay off the entire mortgage, a portion or for a period, such as five years. The longer the length and size of the payoff, the more you’ll likely pay for the protection.
Andy Albright, president and CEO of National Agents Alliance, said mortgage protection insurance has evolved. It used to be that your death benefit would be your mortgage’s outstanding balance. Today, companies design most mortgage insurance policies to pay out the full amount of your original mortgage, no matter how much you owe. The beneficiary can then use the remaining money for anything.
If you pay off your mortgage early, you keep the coverage until the term of your policy expires. Some insurers will allow you to turn that mortgage insurance into a life insurance policy, Albright says.
You can also add riders to help with living benefits. These benefits could include help paying your mortgage if you become disabled and can’t work or lose your job. For instance, you could add a long-term disability rider that pays up to 60% of your income to help your bills if you become disabled and can’t work. Adding riders usually increases your premiums. However, riders can help you customize a policy that works for you.
Who may want mortgage insurance
Anyone with a mortgage balance could benefit from mortgage insurance.
“My advice is to purchase life insurance to cover the mortgage in the event one of the homeowners dies prematurely. Don’t just buy an amount of life insurance equal to the mortgage amount – you probably have other financial bases to cover,” Mitchell said.
Shanbrom said MPI can also help people who rely on the main note holder. If that person dies and can’t make payments, it “could impact the equilibrium of the household and make it hard for those within to go back to work.”
Necole Gibbs, licensed independent broker at TNG Insurance and Financial Services, said mortgage insurance is an especially good idea for young couples with children.
“If something were to happen to either of the two during the term, the surviving spouse would receive the death benefit and would then be able to pay off the mortgage,” Gibbs said.
If you’re concerned about losing money through premiums, you could choose a return of premium policy. Those policies, which can be pricey, pay you back your premiums if you outlive your mortgage insurance. Gibbs said these policies get returned as a lump sum at the end of the policy’s term.
“This is a great strategy because if nothing happens to the couple during the term,” Gibbs said.
MPI is also an option if you don’t want to take a medical exam to buy a regular term life insurance policy. Some insurers don’t require an exam for an MPI policy.
“It opens the window to get life insurance without having to jump through all the hoops,” Albright says.
Mortgage payment insurance exclusions
Shanbrom said companies may include mortgage insurance exclusions for health issues. You may be prevented from getting a policy if you’re:
● A senior citizen
● Have a medical condition like heart problems and cancer
● Permanently disabled
“This is why it is crucial to get coverage as soon as a mortgage is purchased since it is impossible to time when someone’s health can turn for the worse,” Shanbrom said.
How much does mortgage insurance cost?
When figuring out MPI premium costs, insurance companies consider:
● Your age
● Smoking status
● Length and amount left on the mortgage
Another cost factor is whether the policy is joint coverage for both spouses. In that case, the company will pay a death benefit when one of the couple dies. Though that coverage will cost more than if you covered only one person, a mortgage insurance policy would probably still cost less than buying two individual term life insurance policies.
Let’s take a look at possible costs. If you have $120,000 left on your mortgage, you may find a mortgage insurance policy with bare minimum coverage for $50 a month. Adding riders, such as return of premium and living benefits, can increase monthly premiums to $150 or more on that same $120,000 amount.
Don’t confuse mortgage insurance with PMI
Mortgage insurance may sound similar to Private Mortgage Insurance (PMI), but they’re entirely different.
PMI protects the bank or lender in case a homeowner stops paying a mortgage. If you’ve purchased a home with less than 20% down, your lender probably required you to purchase PMI.
While mortgage protection insurance will pay off your loan when you die, PMI is intended to cover a portion of your loan if you default. The benefit is paid to your lender, not your family.
PMI is designed to reduce lender risk. PMI might make it easier for you to get a mortgage, but you need another form of life insurance, such as mortgage protection insurance, to guarantee your loan can be paid off should you die.
Alternatives to mortgage insurance
Mortgage insurance is one way to protect your home, but there are other options, including term life and permanent life, such as a whole life policy.
Most mortgage insurance policies are similar to term life policies. But there are notable differences.
The advantage of purchasing mortgage protection insurance is that you may not need a medical exam.
Here are the pros and cons of mortgage insurance, term and perm coverage.
Mortgage Insurance vs. Term Life and Permanent life
|Term life insurance||
|Permanent life insurance||
No matter what policy you decide, make sure to shop around to find the right plan for you. Mortgage life insurance can be a wise choice if what’s most important is to pay off your mortgage and get a policy that would also pay your mortgage if you become disabled or lose your job.