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Mortgage life insurance, also called mortgage protection insurance (MPI), is a policy that specifically pays off your home mortgage if you die before your home is paid in full. It is specifically used to free loved ones from the burden of making monthly mortgage payments they might not be able to afford otherwise if a primary breadwinner passes away.
While it does offer targeted coverage, there are some drawbacks you should be aware of. Here’s what you should know.
How Mortgage Life Insurance Works
MPI is a type of credit life insurance that covers your mortgage if you die before paying off your home loan. It is a type of credit life insurance that protects the lender’s investment, and payments go directly to the lender and not your loved ones.
Your loved ones won’t inherit a large debt, but they also won’t see any added financial benefits they can use for other purposes. Other than that, it works much like a regular term life policy.
One important thing to note is the amount of MPI paid to a lender often reflects the balance of your mortgage. As your mortgage amount goes down, so does the amount that will be paid to the lender. For example, if you owe $250,000 on your home and die, the insurer will pay the lender.
But after several years of making mortgage payments, that amount will decrease. So, if you only owe $100,000 on your mortgage, that’s the amount the lender will receive.
Unfortunately, with this type of policy, your premium payments stay the same throughout the policy’s life. That means you’re paying the same amount for less coverage over time.
That is one of the primary reasons financial pros recommend a term life or permanent life insurance policy to replace mortgage life insurance. In both policies, your death benefit will remain constant unless you change your coverage intentionally.
As your mortgage amount decreases, you can use the excess for other needs if a payout occurs.
However, those same financial pros say that if you can’t qualify for traditional life insurance, a mortgage life insurance policy is better than having no protection. Mortgage life insurance doesn’t require medical exams, so you can qualify for a policy even if a medical condition makes it challenging to find an affordable traditional life insurance policy.
Another thing worth noting is that MPI usually goes into effect as soon as it is issued. There are no waiting periods, unlike there are with some other policies.
You can also take out an MPI policy with your spouse, which is often the case for co-borrowers. If you pass away simultaneously, the policy pays off the mortgage. If only one borrower passes away, the coverage continues on the other person.
And, if you sell your home and pay off the mortgage, an MPI might not transfer to your new home purchase. The policy could terminate depending on the policy terms. That’s one of the questions worth asking if you’re considering a mortgage life insurance policy.
Finally, don’t confuse mortgage life insurance with private mortgage insurance (PMI). If you take out a conventional mortgage loan and don’t put 20% down, some lenders may require you to get PMI, which pays the lender if you stop making payments for any reason.
Mortgage Life Insurance vs. Term Life Insurance
Term life insurance and MPI provide a way to pay off your mortgage. The primary difference is that your mortgage lender is the beneficiary of your MPI policy, whereas you get to designate your beneficiaries with a term life policy.
In addition, with a term life policy, you can direct that proceeds are used to pay off the mortgage, but beneficiaries are free to choose how they spend them. They may pay off higher interest debts or use the money for other purposes and keep the mortgage in place if the interest rates are significantly lower.
Premiums are level for both policies, but an MPI policy decreases in value as your mortgage balance decreases. The term policy payout remains level for as long as the policy is in place.
Some homeowners may consider a permanent life insurance policy, but those premiums are higher than term life policies, so most people gravitate toward a term life policy. The offset of a permanent policy is that it does accrue cash value over time, unlike a term life policy.
» MORE: See today’s refinance rates
Mortgage Life Insurance vs Veterans’ Mortgage Life Insurance
As a benefit of serving in the US Armed Forces, veterans can tap into Veterans’ Mortgage Life Insurance (VMLI) offered by the Department of Veterans Affairs. This coverage is usually available at an amount equal to your mortgage balance with a maximum of $200,000.
Like MPI, VMLI will pay off your mortgage if you die unexpectedly, but the policyholder makes premium payments directly to the VA, not their mortgage lender. This coverage usually comes at a competitive rate for active duty service members and veterans.
Pros and Cons of Mortgage Life Insurance
Pros
- Provides directed peace-of-mind coverage for your largest asset
- Many policies offer common life insurance riders and benefits. With a living benefits rider, you can access money from the policy’s death benefit if you’re diagnosed with a terminal illness. A return of premium life insurance rider gives back the premiums you’ve paid after a certain number of months.
- A great alternative to traditional life insurance policies that use health as a factor in pricing
Cons
- Riders and benefits often come with extra costs attached
- No policy flexibility. An MPI policy’s beneficiary is the mortgage lender. Loved ones can’t use death benefits for any other reason.
- You will need other life policies to cover other types of expenses after you die
- Usually does not require a medical exam or answering no health questions
- Can be more expensive than other forms of insurance due to no health inquiries
- The payout of an MPI policy usually matches your mortgage balance as it decreases, but your premium stays the same.
- An annual renewable or level-term policy may be a better choice because as you pay down your mortgage, the benefit can be used for other financial goals and expenses.
- Many insurers don’t offer quotes online, making it difficult to compare policies without direct contact with providers
The Bottom Line: Is Mortgage Life Insurance Worth It?
In some instances, MPI may make sense. If you don’t think you can qualify for a traditional term or whole life policy, MPI could be a solution to protect your home. But, because it is not flexible in how proceeds are disbursed, this coverage may not be optimal if you have other options.