Mortgage Protection Insurance Explained: Does Every Homeowner Need It?

Buying a home is a major financial commitment. Depending on the loan you choose, you might be signing up for 30 years of payments. But what happens to a house if the homeowner suddenly passes away or becomes too disabled to work?

Mortgage protection insurance (MPI) can help cover your mortgage under certain circumstances. It can also help you avoid foreclosure if you can no longer work to pay your mortgage.

Let’s take a closer look at what MPI is, what it covers and who might need a policy.

MPI is a type of insurance policy that helps your family make your monthly mortgage payments if you – the policyholder and mortgage borrower – die before your mortgage is fully paid off. Certain MPI policies also offer coverage for a limited time if you lose your job or become disabled after an accident.

Some companies call MPI mortgage life insurance because most policies only pay out when the policyholder passes away.

MPI Vs. PMI

Keep in mind that there are different types of mortgage insurance. MPI isn’t the same thing as private mortgage insurance (PMI). PMI is a type of protection that safeguards the owners of your home loan if you stop paying your mortgage.

Many homeowners assume that their PMI will cover their mortgage payments when they die; this assumption is incorrect. As the borrower, PMI doesn’t afford you any type of protection if you pass away unexpectedly. If you can’t pay your mortgage and you have PMI, your home will likely go into foreclosure.

You’re typically required to pay for PMI if you take out a conventional loan with a down payment of less than 20%. You can only cancel your PMI when your equity reaches 20%.

MPI Vs. FHA Mortgage Insurance

MPI also isn’t the same thing as the mortgage insurance you pay on a Federal Housing Administration (FHA) loan. When you take out an FHA loan, you must pay both an upfront mortgage insurance premium (MIP) and a monthly MIP.

Like PMI, FHA MIP payments protect the lender against mortgage default. However, FHA mortgage insurance offers you no protection as the homeowner if you pass away unexpectedly.

Regardless of whether your loan has PMI or FHA insurance, it can be a good idea to invest in an MPI policy if you can’t afford a traditional life insurance policy and want to ensure your home goes to your heirs. They’ll have the opportunity to take over the monthly payments, but it’s not always easy to budget for a cost you aren’t expecting.

How much a mortgage protection insurance policy can cost you depends on a few different factors. Insurance companies will examine the remaining balance on your mortgage loan and how much time is left in your loan term. The amount of your MPI can also depend on your age and the amount of coverage you want.

Let’s consider the potential MPI cost for a homeowner who’s 50 years old. Let’s say this homeowner has $150,000 remaining on their mortgage and 12 years left to pay off the loan. If they want an MPI policy that covers the remaining loan balance – $150,000 – they can expect to pay about $28.77 a month toward MPI.   

Most MPI policies work the same way as traditional life insurance policies. Every month, you pay the insurer a monthly premium. This premium keeps your coverage current and ensures your protection. If you die during the term of the policy, your policy provider pays out a death benefit that covers a set number of mortgage payments.

The limitations of your policy and the number of monthly payments your policy will cover come with the policy’s terms. Many policies agree to cover the remaining term of the mortgage, but this can vary by insurer. Like any other type of insurance, you can shop around for policies and compare the coverage before you buy a plan.

However, MPI differs from traditional life insurance in a few important ways:

Policy Beneficiaries

First, the beneficiary of an MPI policy typically isn’t your family – it’s your mortgage company. If you die, your family doesn’t see a lump sum of cash like they would with a typical life insurance policy.

Instead, the money goes directly to your lender. When you receive a lump sum payment from a traditional life insurance policy, your family is the beneficiary and can spend the money however they please.

Some homeowners think this is a good thing. It can be hard to budget for a massive payout, and MPI guarantees that the money will go toward keeping your family in your home. However, this also means that your family can’t depend on your insurance to cover other bills. You can’t use an MPI policy to fund things like funeral expenses and property taxes.

If you’re looking for insurance to cover other expenses beyond your mortgage loan, you’ll want to get quotes on additional coverage options.

Acceptance Rates And Insurance Premiums

Secondly, MPI policies have guaranteed acceptance. When you buy a traditional life insurance policy, the cost you pay each month depends on factors like your health and occupation.

You get to skip the underwriting process with an MPI policy, as most policies typically don't require policyholders to submit a medical exam. This can be very beneficial if you’re sick or work in a dangerous/high-risk job.

However, it also means that the average MPI premium is higher than a life insurance policy for the same balance. For adults in good health who work in low-risk jobs, this can mean paying more money for less coverage.

Rules And Regulations

The last difference between MPI and traditional life insurance lies in the regulations involved. MPI policies have several strings attached that can change your benefits. For example, most MPI policies include a clause that states that the balance of your death benefit follows the balance of your mortgage.

The longer you make payments on your loan, the lower your outstanding balance. The longer you hold your policy, the less valuable your policy is. This is different from life insurance policies, which typically hold the same balance for the entire term.

Many MPI companies also have strict limits on when you can buy a policy. Most companies require you to buy your insurance policy within 24 months after closing on your house. However, some companies might allow you to buy a policy up to 5 years after you close on your loan.

Your MPI company may also deny you coverage based on your age, as older home buyers are more likely to receive a payout than younger ones.

You might be wondering whether an MPI policy is right for you. Let’s go over some of the pros and cons of mortgage protection insurance for you to consider before moving forward in the process.

Pros Of Mortgage Life Insurance

Getting an MPI policy can come with these benefits:

• Guaranteed policy acceptance: Guaranteed acceptance means you can’t be denied an MPI policy based on your health condition. This can benefit homeowners who are having a difficult time getting a life insurance policy or would typically have to pay higher rates for life insurance.
• Underwriting not required: MPI plans often don’t require underwriting because most policies don’t need you to submit a medical exam to qualify for mortgage life insurance coverage.
• Peace of mind for your family: An MPI policy means your mortgage payments are covered if you pass away or become disabled. This ensures that your family won’t be responsible for paying off your mortgage or losing the house due to a foreclosure.

Cons Of Mortgage Life Insurance

Unfortunately, MPI might also come with these drawbacks:

• Extra monthly payment: With an MPI plan, you’ll be responsible for making an extra payment every month. You might want to make sure MPI fits into your budget before purchasing coverage.
• Limited payout options: If you pass away, the MPI payout only goes toward your mortgage debt. Mortgage life insurance won’t provide your family with money to cover taxes, bills or funeral costs.
• Alternative policies may work better: If you want an insurance policy that provides more of a financial safety net for your family members, you might consider a traditional life insurance policy over MPI.

Do you think that MPI might be right for you? There are a few different ways you can buy a policy, including:

• Through your mortgage lender: When you close on your loan, your mortgage lender might offer you an MPI policy. You might be able to ask a representative or your real estate agent for a referral to a company that offers an MPI policy if your lender doesn’t offer MPI policies. Rocket Mortgage^® does not currently offer MPI policies.
• Through a private insurance company: There are several private insurance companies that specialize in MPI policies. The specific companies you’ll have access to can vary depending on your state.
• Through a life insurance provider: Many companies that offer life insurance policies also offer MPI. If you have another type of insurance with a nationwide insurance provider, you might also be able to save by bundling insurance coverage together.

No matter where you decide to buy MPI, you might want to make finding a policy your first priority after you close on your loan. Most insurance providers have a limited window in which you can buy a policy. If you miss your window, you might not be able to find an MPI policy.

If you’ve already closed on your loan and no longer qualify for MPI, consider shopping for a term life insurance policy instead.

Learn more about MPI with the answers to these commonly asked questions.

Do I have to buy MPI?

MPI isn’t a mortgage requirement. No matter which type of mortgage loan you choose, you can buy a home without paying for MPI. Though your lender may recommend a policy, it’s completely up to you whether you decide to buy.

How long do I have to maintain an MPI policy?

If you buy an MPI policy, you’ll continue to make monthly premium payments for the duration of the policy term. Your insurance company can cancel your benefits if you stop making your premium payments.

Can I cancel my mortgage insurance policy?

Like most other types of insurance, you’re free to cancel at any time. Keep in mind that you won’t get any of the money back that you paid to your insurance provider when you cancel your policy.

Whether you might want to buy MPI largely depends on your specific needs. If you are a homeowner with underlying health conditions that could affect your long-term well-being, are employed at a high-risk job or are a young person having difficulty getting approved for a life insurance policy, MPI could be a great way to provide you and your loved ones with peace of mind.

However, if you think your family would benefit more from being able to use money from a posthumous insurance payout for things other than your mortgage – like bills, taxes or funeral costs – it might make more sense to pursue a traditional life insurance policy.

Before you can worry about a mortgage protection plan of any kind, you need a mortgage loan. Take action and start your mortgage application with Rocket Mortgage today.