As a homeowner, you invest in homeowners insurance to cover various worst-case scenarios affecting your property. Mortgage protection insurance (MPI), on the other hand, is a different kind of safeguard designed to assist if you’re unable to repay your mortgage. While the additional protection sounds appealing, MPI isn’t suitable for everyone. Here’s when mortgage protection insurance is worth considering.
What is mortgage protection insurance?
Mortgage protection insurance (MPI) is a policy that covers the remainder of your mortgage if you pass away or become disabled and unable to work. It functions similarly to life and disability insurance. However, unlike those policies, the payout goes directly to your mortgage lender to pay off the loan, not to you or your heirs.
MPI policies, often available from banks and mortgage lenders, generally only cover the principal and interest portion of your mortgage payment. Additional expenses such as HOA dues, property taxes, and homeowners insurance remain your responsibility. You may be able to add a policy rider to cover these additional costs.
One major drawback of MPI is that, as you pay off your mortgage, the insurance payout decreases while your premiums stay the same. However, these policies can be easier to obtain than life insurance since they do not require a medical evaluation.
Differences between MPI, PMI and MIP
Mortgage protection insurance (MPI) can easily be confused with private mortgage insurance (PMI).
PMI is required if you’re getting a conventional mortgage with less than 20% down. You must pay PMI until you accumulate 20% equity in your home, either through scheduled repayments, prepayments, or a reappraisal of your home’s value. PMI protects the lender, not you, in case you default on the loan.
Another related term is mortgage insurance premium (MIP), which applies to FHA loans. Like PMI, MIP protects the lender and not you. However, unlike PMI, MIP is typically paid for the entire loan term.
Both PMI and MIP are mandatory coverages. In contrast, an MPI policy is entirely optional and serves a different purpose, covering your mortgage payments in case of death or disability.
How much does mortgage protection insurance cost?
The cost of mortgage protection insurance depends on several factors, including the insurer and the current balance of your mortgage.
Pros and cons of mortgage protection insurance
Mortgage protection insurance might be worth it for people who can’t get approved for traditional forms of life or disability insurance or for whom premiums for a traditional policy are cost-prohibitive. Here are some pros and cons to consider:
Pros of MPI
- Guaranteed acceptance: Most MPI policies are issued on a “guaranteed acceptance” basis. This can be advantageous if you have a health condition and pay high rates for life insurance or struggle to obtain coverage.
- Peace of mind: An MPI policy can provide you and your family with a sense of security.
Cons of MPI
- More cash out of your pocket: The MPI premium adds more of a burden to your monthly budget.
- Might not be the best use of your money: If your mortgage is nearly paid off or you paid for the home with proceeds from another home sale, paying for an MPI policy might not make financial sense. Instead, you might consider putting the money in an emergency fund or retirement portfolio.
- Payoff amount declines: If you plan to make extra payments to pay off your mortgage early, you might not benefit as much from MPI because the loan payoff amount decreases as the mortgage is paid down. Some newer MPI policies include a level-death benefit, meaning that the payouts won’t decline.
- Potentially better alternatives: Because MPI is paid directly to your lender, it won’t provide any financial protection to your loved ones if you die, other than paying off your mortgage. A life insurance policy might make more sense because the policy is paid to your beneficiaries.
Mortgage protection insurance vs. life insurance
While both MPI and life insurance pay out benefits upon your death, life insurance offers more flexibility. The beneficiary of a life insurance policy is typically a family member who can use the funds as they see fit. With MPI, the beneficiary is your lender, and the payout is used exclusively to repay the mortgage. Additionally, life insurance companies provide a broader range of coverage and premium options, while MPI limits coverage based on your property and personal health.
Where to buy mortgage protection insurance
If you believe MPI is a good option for you, there are three main sources to consider:
- Your mortgage lender: Many lenders offer MPI directly to their borrowers. If you’re interested in MPI, reach out to your mortgage lender to see if it’s available.
- Private insurance companies: Several private insurance companies also provide MPI.
- Life insurance providers: Many life insurance companies offer MPI, sometimes calling it “mortgage life insurance.”
Do you need mortgage protection insurance?
MPI is not required and may not always be the best financial decision. You can achieve similar coverage with a comprehensive life insurance policy by using the DIME (debt, income, mortgage, education) method, which considers your mortgage when determining the appropriate amount of life insurance to purchase.
However, MPI can be beneficial if your employment is unstable and you might need help paying your mortgage in the future. It is also a good option for individuals who do not qualify for or cannot afford a traditional life insurance policy.