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.
Mortgage life insurance, or mortgage protection insurance, refers to a set of life insurance products that are designed to pay your outstanding mortgage balance if you die. This coverage is often offered by your bank or mortgage lender, but you can also purchase it through unaffiliated insurers. Since so many parties offer mortgage life insurance, the structure and benefits can vary significantly.
Mortgage life insurance policies have a specified period of coverage, generally 15 or 30 years, and the death benefit can be structured in one of three ways:
Decreasing: The death benefit may be fixed for the first few years of coverage, but then decreases at a specified rate over the life of the policy. This is meant to mimic the rate at which the mortgage is paid off.
Mortgage principal: Some policies tie the death benefit to the outstanding mortgage principal. This will behave similarly to a decreasing death benefit but, if you pay off your mortgage faster or slower than expected, the policy will reflect that.
Level: The death benefit will remain the same over the life of the policy. This may be ideal if you have an interest-only mortgage, since the principal remains the same.
Restrictions of mortgage life insurance
Unlike term life insurance, mortgage life insurance typically pays the death benefit directly to your mortgage lender. If your coverage amount is higher than your outstanding mortgage balance at the time of your death, your family will not receive any excess payout.
In addition, some mortgage protection policies will only pay a death benefit if you die from an accident, similar to accidental death insurance. If this is the case, your policy would not pay out if you die from natural causes, such as cancer or a heart attack. We don't recommend this type of coverage unless your family will be able to handle mortgage payments without you given two or three months' preparation.
Depending on the provider, mortgage life insurance may be tied to your home or bundled as part of the mortgage. If the policy is tied to your home, you would need to get a new policy if you moved later on. And since life insurance quotes are tied to your age, this will mean a higher premium.
Life Insurance Vs. Mortgage Protection
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
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.
How much mortgage protection insurance policy may cost?
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.
Advantages of Mortgage Life Insurance
Your home is your most essential asset, so mortgage protection insurance can provide another layer of safety. The pros include:
Guaranteed acceptance – Most MPI policies are issued on a “guaranteed acceptance” basis. That can be advantageous for people who have health issues and either have to pay high rates for life insurance or are struggling to obtain a policy.
Peace of mind – Right now we’re in an uncertain economy. An MPI policy that will make payments after a job loss can make a big difference if you find yourself out of work.
One of the advantages of mortgage life insurance is it may give your family peace of mind knowing that if something were to happen to you, the mortgage would be paid off. But keep in mind that other forms of life insurance, such as term life insurance, can provide that same peace of mind.
Term life insurance can also give your family flexibility with how they use the life insurance payout. With term life insurance, you can match your coverage amount and policy length to your mortgage. You could also pick a coverage amount or length that factors in other financial responsibilities you want to cover, such as your annual income or children’s college tuition.
Here are a few other advantages to mortgage life insurance policy.
No Life Insurance Medical Exam
Mortgage life insurance generally does not require a medical exam and it may have no health questions, either.
For those with medical conditions, mortgage life can be an alternative to traditional life insurance that uses health as a factor in pricing.
You may have the option of adding life insurance riders to your mortgage protection policy,such as:
Living benefits. With a living benefits rider you can access money from the policy’s death benefit if you’re diagnosed with a terminal illness (often defined as a life expectancy of 12 months or less).
Return of premium: This rider would return the premiums you’ve paid after a certain number of months. Check the rider for specific rules and timelines.
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