Mortgage protection insurance: Who needs it and why

Taking out a mortgage is one of the biggest responsibilities that adults face. Falling behind on mortgage payments can lead to paying more interest charges, late fees, foreclosure proceedings and even losing your house. Mortgage protection insurance (MPI) is one way to safeguard your family and investment in case the unthinkable happens.

Mortgage protection insurance, or MPI, is a type of life insurance that pays the remaining balance on your mortgage to your lender. It is especially beneficial to people with costly mortgages that their dependents couldn’t cover if they died.

The key difference between mortgage protection insurance (MPI) and life insurance lies in their coverage and flexibility. MPI is specifically designed to pay off your mortgage balance directly to the lender if you pass away, while life insurance provides a broader death benefit that your beneficiaries can use for any financial needs, such as mortgage payments, living expenses, and debt.

This flexibility makes life insurance a more versatile option for overall financial protection. However, if you’re unable to qualify for traditional life insurance, mortgage protection insurance can be a practical alternative.

“Mortgage protection insurance offers an option to have payments available so that your family won’t default or foreclose on the mortgage if you die,” said Jordan Shanbrom, a life insurance broker with California Life Coverage.

What is mortgage protection insurance?

Mortgage insurance pays off the remaining balance on your mortgage if you die. This protects your family from falling behind on mortgage payments, which can lead to foreclosure or having to sell your home. 

Depending on the policy, mortgage insurance may pay off the entire mortgage at once or it may pay the mortgage off over a period of time, such as five years. The longer the length and size of the payoff, the more you’ll pay in premiums.

The death benefit for mortgage protection insurance pays the lender on your mortgage — not your family. Unlike traditional life insurance policies, your loved ones will not get to use the money from an MPI policy. 

You can also add riders to help with living benefits. These benefits could include paying for your mortgage if you become disabled and can’t work or lose your job. For instance, you could add a long-term disability rider that pays up to 60% of your income to help your bills if you become disabled and can’t work. Adding riders usually increases your premiums. However, riders can help you customize a policy that works for you.

How mortgage protection insurance works

Mortgage protection insurance policies are typically easy to qualify for, often requiring minimal or no medical exams, making them accessible to those who may not be eligible for traditional life insurance. Premiums are usually fixed and can be added to your monthly mortgage payment for convenience. While the coverage decreases over time as you pay down your mortgage, the premium generally stays the same, ensuring the mortgage is covered as long as the policy is in force.

If you die, the policy pays off your remaining mortgage balance if you pass away during the policy term. Unlike traditional life insurance, the benefit is paid directly to the lender, ensuring that your home is protected from foreclosure.

It’s important to note that this type of insurance is specific to the mortgage and doesn’t provide a payout to your beneficiaries, unlike traditional life insurance, which can be used for various financial needs.

Who needs mortgage protection insurance

Mortgage protection insurance is a smart choice for those with limited savings or who may not qualify for traditional life insurance due to health issues. It typically offers easier approval with minimal or no medical exams, making it accessible for a wider range of people. For homeowners who want a straightforward way to protect their most significant asset, this type of coverage can be a valuable addition to their financial plan.

But for people in good health who are eligible for a traditional life insurance policy, term or whole life insurance is a better option. Unlike mortgage protection insurance, these policies provide a death benefit that can be used not only to cover the mortgage but also to pay for other bills, living expenses, and future financial needs.

“My advice is to purchase life insurance to cover the mortgage in the event one of the homeowners dies prematurely. Don’t just buy an amount of life insurance equal to the mortgage amount – you have other financial bases to cover,” Doug Mitchell, owner of Ogletree Financial, a life insurance agency.

What does mortgage protection insurance cover?

Mortgage protection insurance covers one thing — the remaining balance of your mortgage if you pass away during the policy term, ensuring that your home is paid off and your family is not burdened with mortgage payments. It does not cover anything else — such as final medical bills or funeral costs like a traditional life insurance policy.

The reason it cannot be used for anything else is because the policy pays out to your lender — not your beneficiaries. While traditional policies pay out to your family and can be used however they wish, MPI pays out to your lender and only covers the cost of your mortgage. 

How much does mortgage protection insurance cost?

Mortgage protection insurance rates vary depending on the size of your mortgage and how much time is left on the loan. When figuring out MPI premium costs, insurance companies consider:

● Your age

● Smoking status

● Length of time and amount left on the mortgage loan term

● Whether the policy covers two spouses

Exclusions to getting mortgage protection insurance 

Shanbrom says companies may include mortgage insurance exclusions. You may not be able to get a policy if you are:

●  A senior citizen

●  Not a U.S. citizen

●  Permanently disabled

Mortgage protection insurance vs. private mortgage insurance

Mortgage insurance may sound similar to Private Mortgage Insurance (PMI), but they’re entirely different.

PMI protects the bank or lender in case a homeowner stops paying a mortgage. If you’ve purchased a home with less than 20% down, your lender probably required you to purchase PMI.

While mortgage protection insurance will pay off your loan when you die, PMI is intended to cover a portion of your loan if you default. The benefit is paid to your lender, not your family.

Why mortgage protection is a must for homeowners

For many homeowners, the mortgage is the largest financial obligation they have. Some type of mortgage protection is essential for homeowners because it ensures that your family can continue living in their home even if something unexpected happens to you. Getting adequate coverage prevents the risk of your family facing foreclosure and provides financial stability during a difficult time. Without this safety net, your loved ones may struggle to keep up with payments, potentially losing the home you’ve worked so hard to secure.

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