Find out the disadvantages of mortgage protection insurance – and the times you will really need it
What is mortgage protection insurance?
Mortgage protection insurance, or MPI, is a form of life insurance that is designed to pay off the policyholder’s and mortgage borrower’s mortgage if they die before the mortgage is fully paid off. If you become disabled, some mortgage protection insurance policies will also cover your mortgage payments, although typically only for a limited period of time. Since most policies only pay out at the time of death of the policyholder and mortgage borrower, mortgage protection insurance is sometimes referred to as mortgage life insurance.
Mortgage protection insurance is sometimes confused with private mortgage insurance, or PMI. Private mortgage insurance will protect the lender if you, as the policyholder and mortgage borrower, default on your loan. In that case, your family would still be legally obligated to pay the remaining balance of the loan if you die.
Mortgage protection insurance is also not always required, differing it from private mortgage insurance, which most lenders and banks require you to purchase.
How does mortgage protection insurance work?
Mortgage protection insurance is a policy that pays off the balance of your mortgage if you pass away, and is typically sold through mortgage lenders and banks. Lenders like mortgage protection insurance for one simple reason: lenders get paid in the event that you pass away. With a standard life insurance policy, the death benefit goes to the beneficiaries of your choosing; with a mortgage protection insurance policy, on the other hand, the lender is the beneficiary.
Since the lender will be paid the remaining balance of your mortgage, your family will not benefit directly. For instance, say you owe $150,000 on your mortgage; your mortgage protection insurance policy will pay that off and the property would become mortgage free. However, your family does not get a say in how that cash is spent.
The death benefit of your mortgage protection insurance policy decreases over time because your mortgage decreases over time, as you make your payments.
Benefits of mortgage protection insurance
The benefits of mortgage protection insurance include the following:
Guaranteed approval. There is guaranteed approval for mortgage protection insurance, even if you work a dangerous job or are already in poor health. When applying for mortgage protection insurance, there are no lab tests or medical exams.
No guesswork. The money goes directly to your lender for the exact balance of your mortgage, which means there will definitely be enough. In addition, your family will not be required to handle the funds.
Disability protection. There are mortgage protection insurance policies that include disability if you should lose your job in an accident. The MPI policy will make mortgage payments for you, although generally for a limited period of time.
Disadvantages of mortgage protection insurance
The disadvantages of mortgage protection insurance include the following:
Lack of flexibility. Mortgage protection insurance police don’t give your beneficiary much choice. The policy will pay off your mortgage and nothing else, which means your family cannot use the money for another purpose.
Higher cost. Especially for responsible and healthy adults, mortgage protection insurance usually costs more than term life insurance. It should be noted as well that there are policies that do not guarantee that the price will remain consistent during the term of the coverage.
Shrinking coverage. Your mortgage protection insurance policy declines alongside your mortgage balance, which means that you might end up paying more money for less coverage over the long term.
More restrictive age limits. Compared to term life insurance policies, mortgage protection insurance policies usually have more restrictive issue ages. Not all insurers will issue a 30-year MPI policy to people aged 45 and older, for instance.
When do you really need mortgage protection insurance?
When you really need mortgage protection insurance depends largely on your specific needs. If, for instance, you are a younger person finding it hard to get approved for a life insurance policy, if you are working a higher-risk job, or if you are a homebuyer who has underlying health conditions that may impact your long-term health, a mortgage protection insurance policy could be your best bet to give your loved ones, as well as yourself, peace of mind.
On the other hand, it makes more sense to get traditional life insurance instead of mortgage protection insurance if you think your family would benefit more from the freed-up money of a posthumous insurance payout for anything besides your mortgage.