Mortgage Protection Insurance: Does Every Homeowner Need It?
Victoria Araj6-minute read
June 04, 2021
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 (MPI) 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 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. 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.
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Life Insurance Vs. Mortgage Protection: Key Similarities And Differences
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.
However, 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.
Acceptance Rates And Insurance Premiums
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.
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. 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.
Do You Have To Have Mortgage Protection Insurance?
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.
MPI Vs. PMI
Keep in mind that MPI isn’t the same thing as private mortgage insurance. PMI is a type of protection that safeguards the owners of your home loan 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. You will typically be required 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 Vs. FHA Mortgage Insurance
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, FHA insurance payments protect against default on mortgages. However, FHA mortgage insurance affords you no protection as the homeowner.
Regardless if your loan has PMI or FHA insurance, 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.
How Long Do You Have To Have Mortgage Protection Insurance?
If you buy a mortgage protection insurance 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. 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.
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 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 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.
How much a mortgage protection insurance policy may 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. As with a traditional life insurance policy, they’ll also take your age, job and overall risk level into consideration. In general, though, you can expect to pay at least $50 a month for bare-minimum MPI coverage.
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The Bottom Line: Is Mortgage Protection Insurance Worth It?
The question of whether it’s worthwhile to buy mortgage protection insurance is largely dependent on your specific needs. If you’re a homeowner with underlying health conditions that could affect your long-term well-being, if you’re employed at a high-risk job or if you’re 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 feel as though 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 rather than MPI.
As a homeowner, it’s natural to want to take as many precautions against the unknowns of the future as you can. Check out our article on hazard insurance and why you might need it.
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