May 30, 2023
Should You Get Mortgage Protection Insurance?

Should You Get Mortgage Protection Insurance?

However, mortgage protection insurance, also known as mortgage life insurance, isn’t right for everyone. Here’s a closer look into what this insurance coverage can do and how to determine whether or not getting such a policy is right for you.

What Is Mortgage Protection Insurance? 

Mortgage protection insurance, or MPI, can prevent such an event. If you have this policy, the insurance company will typically pay the lender the remaining mortgage balance after your death. Some MPI policies will also pay out to the lender for a specific period of time if you become unemployed or disabled, so there is no interruption of payments.

“For a homeowner who is concerned about something happening to them and they have dependents, MPI can be beneficial,” says Dianne Crosby, senior vice president of mortgage lending at Guaranteed Rate. “I got MPI for myself after I got divorced because I have three children. I didn’t want to leave them with that burden. It gave me and them an extra layer of protection.”

As the MPI policy holder, you would pay your premiums over a specific term. During that time, you are covered. The benefit from this kind of insurance is generally decreasing, meaning the possible payout goes down over time. As you pay off more of your mortgage, there is less loan for your insurance to cover.

Pros and Cons of MPI

While MPI can be beneficial to you and your loved ones, there are also downsides to consider before getting a policy. Here are some pros and cons:

  • May not be a good deal. The premium doesn’t change as you make your mortgage payments and pay down the principal, but the death benefit declines as your loan balance decreases. 
  • Restricted payout. Since the death benefit only goes toward the home loan, MPI won’t help if your loved ones need the money for other expenses related to your passing. 
  • An extra payment. If you can’t afford another expense, the cost of MPI may be too stressful.  

“Lenders like MPI, too, because it lowers the risk of foreclosure,” says Bob Chitrathorn, a certified plan fiduciary advisor and the chief financial officer and vice president of Simplified Wealth Management in Corona, California. “They know the mortgage will be paid off if you pass, and they won’t have to knock on doors to ask for payment. Lenders don’t want to go through the hassle and costs of foreclosing on the home. It takes too much time and money.”

Still, MPI may not the right choice for you. Be sure to consider all your choices.

Alternatives to MPI

MPI is not the only strategy to help your heirs keep the home. Another option is a level term life insurance policy. It’s more flexible than MPI because the money goes directly to your beneficiaries. In contrast, since the MPI death benefit is restricted to your mortgage, it won’t cover your lost wages, funeral costs or other end-of-life expenses.

“A term life insurance policy that incorporates other debts and liabilities might have (a) higher death benefit than one strictly for the mortgage,” says Logan Wease, president of We Insure Things, which sells MPI. “In some cases, it is also less expensive.” However, life insurance policies can be prohibitively expensive if you’re older, have a preexisting illness or lead a dangerous lifestyle, Wease says, while the primary factors in MPI premiums are the amount of the coverage and your age.

“You get more benefits with term insurance, but if you’re just looking to cover the mortgage, MPI is the way to go,” Chitrathorn says. “It can also prevent squabbles. With term life insurance, the money passes to a beneficiary – a brother, sister, a daughter – and it’s up to that person to decide to pay off the house. With MPI, the mortgage gets paid free and clear.”

Another alternative to MPI is building savings and investments. Instead of making premium payments over years that may never pay out, you can save your money and invest it so it grows. If you have amassed enough, it can be sufficient to pass on to your loved ones when you die, so they can either make the payments or pay off the loan.

How MPI Differs From Other Mortgage Insurance Policies 

There are a few other common insurance policies associated with homeownership that are distinct from MPI. Here is what they are:

Where to Buy MPI

Is MPI Ever Required?

Unlike some insurance products that are required when you buy a home, MPI is optional. However, MPI may be worthwhile to get under certain circumstances. For example, if you believe that your relatives will have a hard time making the mortgage payments after you die and you don’t want them to handle the money, it can make sense. You may also consider it if you can’t get a term life insurance policy or can only get a high rate because of your age, health or lifestyle.

It’s not always easy to determine if an MPI policy is a wise decision, so consult with a qualified financial planner. “Also talk to an insurance agent and ask if it will fit into your profile,” Crosby says. “Not all financial planners are well versed in this type of policy. That person should be honest, forthright and experienced.”

After all, insurance coverage only makes sense when it’s affordable and will help you achieve your goals.

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