If you were to die with a mortgage balance remaining, mortgage protection insurance — also known as mortgage life insurance — would ensure it got paid off. That way, your loved ones could continue to live in your home without worrying about continuing to make payments.
This might sound like a good arrangement, especially considering how big of an investment a home is and how much of a family’s budget monthly mortgage payments can comprise. But is mortgage protection insurance really necessary, and is it actually the best way achieve that peace of mind?
What is mortgage protection insurance?
Mortgage protection insurance (MPI) is a type of life insurance, often offered by mortgage lenders and insurance companies, that ensures any balance remaining on your mortgage gets paid off in the event you pass away. “Some mortgage protection insurance policies also offer payment protection for a limited time if you lose your job or experience a disability during the term, although that is not necessarily standard with all policies,” said Yahoo Finance.
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This is different from a typical life insurance policy where a death benefit is paid out to your beneficiaries. Instead, with mortgage protection insurance, the payout goes directly to the mortgage lender. Note that MPI typically will “only cover the principal and interest portion of a mortgage payment,” meaning “other fees like HOA dues, property taxes and homeowners insurance would still be your responsibility,” said Bankrate.
Should you get mortgage protection insurance?
Mortgage life insurance is by no means necessary; it is entirely optional. But if you are looking for peace of mind, “most MPI policies are issued on a “guaranteed acceptance” basis, which “can be advantageous if you have a health condition,” as there is no health exam required to qualify, said Bankrate.
Even so, “mortgage protection life insurance policies are generally ill-advised,” said Investopedia. For starters, MPI serves a very limited purpose, and the money a policy pays out will go to the mortgage lender, not your beneficiaries. Premiums can also be steep and are “often much higher than term life insurance,” said NerdWallet.
Further, those premiums stay the same over time, even as the payout decreases as you pay down your mortgage. Particularly “if your mortgage is nearly paid off or you paid for the home with sale proceeds from another home, paying for an MPI policy might not make the most financial sense,” said Bankrate.
How does mortgage protection insurance compare to life insurance?
If you are worried about protecting loved ones from mortgage payments in the event of your death, a “term life insurance policy typically provides more bang for your buck,” said NerdWallet. For one, life insurance is “more flexible than MPI because the money goes directly to your beneficiaries” as opposed to your mortgage, allowing your beneficiaries to use the money as needed, said U.S. News & World Report.
Additionally, while the value of MPI declines over time as you pay down your mortgage, the “death benefit on a standard term policy remains the same,” said Experian. That said, mortgage protection insurance does not require a medical exam to qualify for coverage, while life insurance does.
