Your mortgage is likely one of your most considerable financial obligations. But what would happen to your home loan if you were to pass away suddenly? After all, missing mortgage payments can lead to foreclosure, leaving your family members at risk of losing their home.
That’s why there is mortgage protection insurance.
This type of insurance coverage protects your mortgage if you die before paying off the balance of your home loan. This type of insurance is a good option if you ever had a concern about how your loved ones would come up with the monthly mortgage payments if you were to pass away suddenly. Since your home is a significant financial asset, protecting it with an insurance plan can be a good move.
However, mortgage protection insurance isn’t a suitable option for everyone, and these policies aren’t as popular as they once were. Traditional life insurance policies such as term life insurance can often serve the same function at a lower rate while offering many additional benefits.
So when are mortgage protection insurance policies a good idea? Who are they suitable for, and what are the alternative options? Read on to find out.
Mortgage Protection Insurance vs. Term Life Insurance
Mortgage protection insurance also referred to as an MPI policy, is a life insurance policy specifically designed to finish paying off your mortgage balance if you pass away before paying off your home.
Owning a policy provides financial protection to your family by eliminating the need to continue with monthly payments towards the mortgage.
These policies match the duration of your mortgage loan and have a declining death benefit. That means as your mortgage balance goes down, the value of your mortgage insurance policy will go down as well. Generally, the policy value will decrease by a set percentage for each year, coinciding with the remaining balance of the home loan.
If you die before the home loan balance is paid off, the funds from a mortgage protection plan go straight to your lender and not to a family member or another beneficiary. So basically, your lender is the beneficiary of the policy.
With this type of insurance, your mortgage loan can be paid off immediately, and your family members won’t be dipping into their savings accounts to keep up with mortgage payments.
Term Life Insurance for Mortgage Protection
Most of today’s mortgage life insurance plans are term life insurance policies. However, many life insurance companies market term life insurance as mortgage protection insurance, which can cause some confusion.
A term life insurance policy has multiple contract lengths making it easy to match the duration left on your mortgage. The death benefit is also level throughout the entire term length, meaning it stays the exact amount and will not decrease.
So, if you have a 30-year mortgage, you could purchase a 30-year term insurance policy. If you die during your policy term, the funds are paid directly to your beneficiary, not your mortgage lender.
The death benefit payout of a life insurance policy can be used to continue with mortgage payments or pay off the entire mortgage loan balance.
Similarities and Differences between MPI Policies and Term Policies
In some ways, mortgage protection and term life insurance share similar features. For example, each option requires a premium that lasts over the length of your policy, and a death benefit will payout if you die while the contract is active.
The payout amount can cover a significant financial obligation and protect your family. However, there are also substantial differences between mortgage protection and term life insurance. Differences are discussed below.
A mortgage protection insurance policy pays directly to your mortgage lender
If you die and have an active mortgage protection policy, your mortgage company or lender would receive the benefit payout of the policy. In return, your family will be free from having to make any further mortgage payments. When owning an MPI policy, there is no death benefit payout made to your family members.
A term life insurance policy will payout to any beneficiary you list on the policy. The beneficiary can then use the money however they choose. Although the policyholder may have purchased the coverage with the intention of the death benefit being used towards mortgage payments, it is up to the beneficiary to choose how they spend the claim proceeds. They are not restricted to how they choose to use the death benefit money when received.
Mortgage protection insurance only covers the amount of your mortgage balance
A mortgage protection plan only covers your mortgage balance. You could not add to the coverage to protect other financial obligations that could potentially be placed upon your family if you were to pass away. It is strictly limited to the amount required to pay back the mortgage lenders.
With a term insurance policy, you choose the death benefit amount to match your mortgage loan. You may also choose to add to that amount. Other life events that require financial protection can be factored into the total value of the life insurance coverage. You’re not limited to only protecting the mortgage balance with term insurance.
The benefit amount of mortgage protection plans decreases over time
Whereas a traditional life insurance policy maintains the full benefit amount throughout the contract, the benefit amount of your mortgage plan will decrease each year as your mortgage debt decreases.
The benefit amount of your term life insurance plan will remain the same amount over the life of your policy. However, most life insurance providers will allow a one-time decrease in the coverage amount upon request and only if needed.
Mortgage protection life insurance plans are easy to qualify for
Mortgage protection insurance plans don’t require a medical exam, and you generally can’t be turned down for a policy. But, conversely, even no exam traditional policies have medical underwriting standards and can be challenging to acquire for smokers, people in poor health, people with dangerous hobbies, or people in certain professions.
Mortgage protection life insurance plans do not offer riders
Most life insurance plans offer additional benefits to your coverage in policy riders. A policy rider allows you to get extra value from your life insurance policy.
One of the most common riders is the terminal illness rider which allows advanced access to the death benefit if you become diagnosed with a terminal illness. Other policy riders found with most life policies include:
- Accidental Death
- Children’s Term Insurance
- Living Benefit Riders
- Waiver of Premium
There are generally no riders or living benefits included or offered with mpi policies. Plans offer limited benefits as the sole purpose is to pay off the mortgage if you die.
Mortgage Protection Insurance Cost
The cost of MPI policies will depend on several factors such as your age, the loan size, the amount of time left on the mortgage, and the provider.
Although you won’t be required to complete any medical underwriting, the average cost of MPI policies tends to be double or more than if you were to purchase a comparable term insurance plan.
Cost of a Term Life Insurance Policy
A term insurance policy is likely to be a cheaper option in protecting your mortgage, considering you must go through an underwriting process to be eligible. Additionally, your policy’s size and term length can make a big difference in your monthly premium.
The insurance company you purchase your policy from can also impact your final price. Therefore, it’s always good to shop around and compare quotes for different mortgage term life insurance policies before making your final choice.
How Long Does It Take To Get Mortgage Protection Insurance?
The time it takes to secure a mortgage life insurance plan will vary depending on the company you choose. Some companies offer online applications with approval for a policy made in minutes. Other companies will take a week or two to reach their conclusion.
With term life insurance coverage, the same applies. You will easily find many providers that can offer instant decision policies with coverage as high as $1,000,000 with no medical exams required for those in good to average health.
When You Might Need Mortgage Protection Insurance
A mortgage is many people’s largest financial obligation. Having a plan to cover any remaining balance on it if you were to pass away is a smart idea. There are times a mortgage life insurance plan makes sense over a term insurance policy.
For instance, if you have health conditions that would make qualifying for a term life insurance policy difficult or if you’ve been denied life insurance coverage in the past, a mortgage protection plan might be a better choice.
Another time mortgage protection might be a good move? If you have military service history. Veterans with a disability connected to their service might qualify for a mortgage protection life insurance policy (VMLI) through the United States Department of Veterans Affairs at very affordable rates.
There are eligibility requirements required to qualify. The coverage amount is also limited to a maximum of $200,000, and the death benefit is decreasing. If you’re a disabled veteran, you can check the eligibility requirements and use their VMLI premium calculator to view monthly rates.
Mortgage Protection Insurance vs. Private Mortgage Insurance (PMI)
Mortgage life insurance and private mortgage insurance (PMI) are easy to confuse, but these two terms refer to two different insurance products.
PMI protects your lender if you default on your loan. However, it won’t cover your balance if you pass away, and it won’t prevent your home from going into foreclosure.
PMI is generally required if you have a conventional loan and your downpayment on the loan is less than 20 percent of the home’s purchase price. PMI can also be required if you choose to refinance your mortgage with a conventional loan and the home equity is less than 20 percent of the home’s value.
Mortgage Protection Insurance Vs. FHA Mortgage Insurance
PMI and FHA mortgage insurance share the same feature in that they protect the lender of the loan. However, neither of the two options covers your mortgage balance if you die before your loan is paid off, and it won’t keep your home out of foreclosure.
With an FHA loan, the insurance is called a mortgage insurance premium or MIP for short. It is a requirement if you have an FHA loan and your down payment on your home purchase is less than 20 percent.
|Mortgage Life Insurance||Term Life Insurance||Private Mortgage Insurance PMI||FHA Mortgage Insurance|
|Pays you mortgage if you die||Yes||Yes||No||No|
|Money goes to your mortgage lender||Yes||No||Yes||No|
|Money goes to your beneficiary||No||Yes||No||No|
|Is required when you take out a mortgage||No||No||Sometimes||Yes with FHA loans|
How to Buy Mortgage Protection Insurance
You can purchase mortgage life insurance in a few different ways. It’s always a good idea to shop around and see quotes from multiple insurance companies before making your final decision.
However, it’s important to note that most mortgage insurance providers will only sell you a policy in the immediate few weeks after you close on your mortgage. It will be challenging to find a policy if you wait longer than about after closing,
You can find mortgage protection insurance policies through:
Your real estate agent – Check with your real estate agent as they may be able to refer you to a company that sells mortgage insurance policies.
Your bank or lender – Your bank or lender might offer you a plan while you’re finalizing your loan or closing on a loan. You can bring it up with them if they don’t.
A private insurance company – Multiple private insurance companies specialize in mortgage insurance. Some companies only operate in specific regions or states.
An insurance agent or broker – You can reach out to an insurance agent or broker for assistance finding the right mortgage insurance plan for you. However, they may recommend a term insurance policy as a better alternative to a PMI policy.
A life insurance provider – Many life insurance providers also sell some form of mortgage protection insurance. If you already have life, vehicle, or homeowners insurance, check with your provider. They might offer mortgage life insurance, and you might qualify for a multi-policy discount for being a loyal customer.
The Department of Veterans Affairs – If you’re a disabled Veteran, the Department of Veterans Affairs can help you secure a mortgage insurance plan at a great rate.
Advantages of Mortgage Protection Insurance
Although this type of policy isn’t as popular as it once was, mortgage life insurance plans have some advantages that appeal to many consumers. Benefits of mortgage insurance include:
Guaranteed acceptance – You can’t be turned down for a mortgage insurance plan.
No medical exam or medical underwriting – There is no medical exam, no medical questions, and no medical underwriting.
Simple terms— The terms of a mortgage life insurance plan are simple. The money goes directly to your mortgage lender, saving your family paperwork and hassle.
Disadvantages of Mortgage Protection Insurance
Mortgage insurance plans aren’t suitable for everyone, and they have some significant drawbacks. Disadvantages of mortgage protection insurance include:
The death benefit decreases over time – The policy benefit decreases over time, but your premiums may remain the same. This means you’ll pay the same amount for less coverage with your policy every year.
No flexibility – An MPI policy does not offer flexibility with how the death benefit can be spent. The death benefit of the mortgage policy can only be used to pay off your mortgage.
High cost – The cost of a mortgage insurance plan will be higher than the premiums for a term life insurance policy with the same term length and death benefit amount, assuming you are young and healthy.
Restrictive age limits – Some mortgage life insurance plans have strict age limits. This means that you might not be able to get a mortgage protection insurance plan that matches the term length of your mortgage if you’re over 50.
You still pay property taxes – MPI policies only payoff home loans. However, your family will still need to pay the annual property taxes. A mortgage term life insurance policy can allow you to account for potential property taxes by adding to the coverage amount.
Best Alternative to Mortgage Protection Insurance
One of the best alternatives to mortgage insurance is term life insurance. Of course, whole life and universal life insurance policies are also good options, but term life is generally the best choice for young families as well as anyone looking at affordability.
Term life insurance can provide many benefits as mortgage protection insurance, but you can often get more coverage at a better rate.
A traditional term life insurance plan can include the total amount you owe on your mortgage plus any other debt you have, future expenses such as your children’s education, income replacement to help provide for your family, and coverage for your final expenses.
You can even set the term length of your policy to match up with the term of your mortgage. Other advantages include:
Your family can use the money for anything they need – Your mortgage is an important expense, but there might be more pressing financial needs if you pass away suddenly. Therefore, it might be better for your family to continue making monthly mortgage payments and use the large sum towards medical bills or other expenses. A term life insurance policy will give them this flexibility.
You might get a much better rate – If you’re young and healthy, you’ll likely pay less for term life insurance than for a mortgage protection insurance plan.
You don’t always need to take a medical exam – You might be worried that you’ll need to take a medical exam to secure a term life insurance policy, but that’s not always the case. You can get a great term policy from many top term insurance companies without an exam.
- Many term policies include living benefits – Living benefits are policy riders included with the based coverage. Some are included at no extra cost, while other providers may charge a fee. Depending on the living benefit being offered, you may be able to accelerate a portion of your death benefit if you become sick with a chronic, critical or terminal illness. Check out this article on Transamerica’s Living Benefits term insurance to understand how this new and exciting life insurance feature works.
Is Mortgage Protection Insurance Worth It?
Mortgage insurance helps you protect your home and family in the event of your death. It ensures that your mortgage balance will be paid off if you die unexpectedly and can give you the security of knowing your family will never face foreclosure.
Mortgage insurance policies have death benefits that match the amount of your mortgage. As you pay down your mortgage, the death benefit amount of your policy will also decrease. If you die during the life of your policy, the death benefit will be paid directly to your mortgage lender.
For some families, mortgage insurance policies are a great choice. However, a term life insurance policy is likely a better choice and more affordable option. You’ll be able to get more coverage at a better rate, and the money will go straight to your family if you pass away.
Plus, you can get an excellent policy without a medical exam. At No Medical Exam Quotes, we can show you no-obligation quotes from the top no exam to companies. Please fill out our quick quote form to get started today.