Do you need mortgage protection insurance?
Fact-checked with HomeInsurance.com
Once you close on your mortgage, you typically start receiving solicitations for mortgage protection life insurance (MPI). Often, these are hard-core sales pitches that lay on the guilt: are you willing to leave your family high and dry if the worst should happen? How will they keep up on mortgage payments if you were to die?
Here’s the real question: are these sales claims true? What is Mortgage Protection Insurance and do you need it? Not to be confused with PMI (we’ll talk about that later), MPI is a type of insurance that pays your mortgage lender if you are disabled or die and cannot make payments on your mortgage. In some ways, it’s like a life insurance policy, but it’s often not your best bet financially. Why? Let’s take a deeper look at what it is first.
What is mortgage protection insurance?
If something happens to you that leaves you unable to pay your mortgage payments, mortgage protection insurance will make a direct payment to your lender to pay off your mortgage. Because of that, it benefits your mortgage holder, rather than you. You or your beneficiaries receive nothing in the way of a payout because it goes right to your mortgage holder.
MPI policies are somewhat strict: you can take them out only for the length of your mortgage, so they are normally locked in for 15 or 30 years, and once the mortgage is paid, nothing returns to you unless you have a specific return-of-premium rider, in which case you are refunded the sum of your premium payments.
Although there is no underwriting with MPI — which may work to your benefit if you’re in poor health and can’t qualify for a term life insurance policy — there are age restrictions. Many companies will not cover you if you’re older than 45, for example, or in some cases even younger; or you may be limited to a 15 year policy if you are over a certain age.
What is the difference between PMI and MPI?
Mortgage Protection Insurance and Private Mortgage Insurance (MPI) may sound the same, but they are two completely different types of policy. If you’re just starting out and aren’t able to pay a 20% down payment on your mortgage, your lender will require private mortgage insurance, which will pay the mortgage if you default on it.
The premiums for PMI are usually lumped together with your mortgage payments. Once you’ve paid off roughly 20% of the value of your home, PMI goes away. However, PMI won’t be any use to your family if you die before you pay off your mortgage.
With MPI, your payments are separate from your mortgage payments, and you generally keep the policy for as long as you have the mortgage.
Do you need MPI?
Marketing for Mortgage Protection Insurance can be intimidating, with advertisements threatening that you’ll be leaving your loved ones with no resources if you were to suddenly die. But is an MPI really the right way to address that concern? For most people, the answer is “probably not.”
If you are worried about what would happen to your mortgage if you were to die or be disabled, a better choice is to consider a term life insurance policy. Term policies are about half the price of mortgage protection insurance for one thing, and they give your heirs the flexibility to use the payout as they wish instead of it going solely to the mortgage. You don’t have this luxury with MPI: the payout goes directly to the lender, leaving nothing for your family.
Although this may not be clear from the start, MPIs may also feature fluctuating premiums, with a fixed premium price for a certain number of years, but the possibility that it will increase after that. Another thing to keep in mind: as your mortgage decreases over time, the payout value of your MPI policy is less, but your premiums don’t decrease at the same time.
For example, say you purchase an MPI policy when you owe $100K on your mortgage. If something were to happen to you, the policy would pay the $100K to your lender. But then ten years pass and you only owe $50K. You’re still paying the same premium for the policy, but now the insurer would only owe the lender $50K if you were to die or become disabled. With a term life insurance policy, your payout benefit never changes.
There is one type of person who may benefit from Mortgage Protection Insurance. If you are in poor health and unable to buy a term life insurance policy, MPI might work in your favor, since there is not usually any health requirement to purchase a policy. But even then, it’s worth first exploring term insurance to see if you can find an insurer who will work with you.
Mortgage Protection Insurance (MPI) may sound like a good idea, but in most cases, term life insurance is a cheaper and more flexible option.
- MPI pays your mortgage, but term insurance can be used for any purpose.
- MPI is more expensive than term insurance.
- It can be hard to get the specifics on MPI, such as online quotes.
- Decreasing payout means they are not cost-effective.
New mortgage owners frequently get hard-sell invitations to purchase mortgage insurance in case of death or disability, but it pays to consider whether a term life insurance policy is an option you and your loved ones may benefit more from having.
Mortgage life insurance policies are hard to get online quotes for, and when you do, you will probably find that they’re considerably more expensive than term policies. They also feature a dwindling payout, since your mortgage will decrease over time, although your premium for the MPI won’t.
With the flexibility of using a term life insurance policy to meet the needs of your family, MPI may not be worth consideration. The exception is for the rare occasion in which you do not qualify for a term life insurance policy at all.