Buying a home is a major financial commitment. Depending on the loan you choose, you might commit yourself to 30 years of payments. But what will happen to your home if you suddenly die or become too disabled to work?
Mortgage protection insurance can help your family cover your mortgage under certain circumstances – you can 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.
What Is Mortgage Protection Insurance?
MPI helps your family make your monthly mortgage payments when you die. Some MPI policies will also offer coverage for a limited time if you lose your job or become disabled after an accident. Some companies call it mortgage life insurance because most policies only pay out when the policyholder dies.
Most MPI policies work the same way as traditional life insurance policies. Every month, you pay your lender a 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 lender. Like any other type of insurance, you can shop around for policies and compare lenders before you buy a plan.
MPI differs from traditional life insurance in a few important ways. 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 term life insurance policy. Instead, the money goes directly to your lender. When you receive a lump-sum payment from a term 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 cannot use an MPI policy to fund things like funeral expenses and property taxes.
Secondly, MPI policies have guaranteed acceptance. When you buy a term 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. This can be very beneficial if you’re sick or work in a dangerous or high-risk job. However, it also means that the average MPI premium is higher than a life insurance policy for the same balance. For healthy adults who work in low-risk jobs, this can mean paying more money for less coverage.
The last difference between MPI and traditional life insurance are the regulations involved. MPI policies have a number of 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. 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 because older home buyers are more likely to receive a payout than younger ones.
How Long Do You Have To Have Mortgage Protection Insurance?
You’ll continue making monthly premium payments for the term of your policy if you buy a mortgage protection insurance policy. Your insurance company can cancel your benefits if you stop making your premium payments. Like most other types of insurance, you’re free to cancel at any time. However, keep in mind that you won’t get any of the money back that you paid to your insurance provider when you cancel.
Is Mortgage Protection Insurance Mandatory?
MPI isn’t a mortgage requirement. No matter which type of 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 or not.
Keep in mind that MPI isn’t the same thing as private mortgage insurance. PMI is a type of protection that safeguards your lender if you stop paying on your mortgage loan. 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 can’t pay your mortgage and you have PMI, your home will still likely go into foreclosure. Your lender will typically require you to pay for PMI if you take a conventional loan with less than 20% down. You can only cancel your PMI when your equity reaches 20%.
MPI also isn’t the same thing as the mortgage insurance you pay on an FHA loan. When you take an FHA loan, you must pay both an upfront mortgage insurance premium and a monthly premium. Like PMI, MIP payments protect your lender in the event that you default on your mortgage loan. Despite the fact that you fund the MIP payments, MIP affords you no protection as the buyer. If you die and cannot continue to pay your mortgage, your home will still go into foreclosure with MIP.
While MIP and PMI may be mandatory depending on your loan type and down payment, mortgage protection insurance isn’t mandatory. However, it can be a good idea to buy an MPI policy if you cannot afford a traditional life insurance policy and want to ensure your home goes to your heirs.
Where To Buy Mortgage Protection Insurance
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 offer MPI policies.
- Through a private insurance company. There are a number of 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 should 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.
Mortgage protection insurance helps your family avoid foreclosure if you die while you owe money on your mortgage loan. Some MPI policies may also compensate you for a limited time if you become disabled or lose your job.
MPI works in the same basic way as a term life insurance policy. You buy a policy and make monthly premium payments to keep your coverage current. If you die during your policy term, your insurance provider pays the agreed balance directly to your mortgage company. If you don’t die during the term of your policy, your policy expires.
Unlike life insurance, MPI doesn’t involve underwriting. This can make an MPI policy more affordable if you work in a high-risk job or you’re sick. However, the lack of an underwriting process also makes MPI more expensive than comparable life insurance policies. If you’re healthy and you work in a low-risk industry, you’ll usually save money when you take a life insurance policy over MPI.
MPI isn’t the same thing as private mortgage insurance. PMI affords you no protections as the policyholder. Instead, PMI compensates your lender if you stop making payments on your loan. PMI doesn’t take over your monthly payments on your behalf. If you die and have PMI, your home will still likely go into foreclosure if your family cannot pay. While your lender might require you to have PMI if you put less than 20% down, MPI is voluntary. MPI is also not the same thing as the mortgage insurance required on FHA loans.
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