MORTGAGE PROTECTION INSURANCE (MPI): How It Works

Mortgage protection insurance

Many people get life insurance to cover outstanding debt, such as a mortgage on their home. Mortgage protection insurance, or MPI, is a type of life insurance that pays off your remaining mortgage if you die. Unlike other types of life insurance, MPI only pays the death benefit to your mortgage lender, making it a far more limited option than a typical life insurance policy. Let’s learn more about MPI and how it works, as well as how much it costs to obtain mortgage protection insurance and whether buying a policy is good for you.

What Is Mortgage Protection Insurance?

Mortgage protection insurance works similarly to life or disability insurance. The monthly premium is determined by the cost of the mortgage, your age, and your health. In general, MPI policies only cover the principal and interest part of a mortgage payment, so additional payments such as HOA dues, property taxes, and homeowners insurance remain your responsibility. However, you may be able to add a policy rider to cover these costs.

Some plans are intended to assist persons living in your house, or loved ones, in making mortgage payments in the case of your death. For example, if you die with a mortgage amount and have an MPI policy, your insurer will pay the remaining sum directly to your lender. Your partner or heirs will not be concerned about making the remaining payments or losing the house.

How Does Mortgage Protection Insurance Work?

mortgage protection insurance
Image Source: Roban Financial

Mortgage protection insurance (also known as mortgage life insurance and mortgage protection life insurance) is a policy that pays off the remaining balance of your mortgage if you die. It is frequently sold by banks and mortgage lenders.

Lenders favor mortgage life insurance since they are the ones who get paid when you die. A standard life insurance policy’s death benefit is paid to the beneficiaries you specify. The beneficiary of a mortgage life insurance policy, on the other hand, is the lender, who will be paid the remaining balance of your mortgage.

As a result, your family benefits only indirectly. If you owe $150,000 on your mortgage, the mortgage protection policy will pay it off, making the property mortgage-free, but your family will have no say in how that money is spent.

Because your mortgage balance reduces over time as you make payments, the death benefit of your mortgage life insurance also diminishes.

Is it worthwhile to purchase mortgage protection insurance?

If you are unable to obtain a life insurance policy owing to age or health difficulties, MPI is a viable option. Before signing up with your mortgage lender, look into multiple mortgage protection companies to ensure you’re getting the best offer. However, first, determine whether you are eligible for a typical term life insurance policy.

A term life insurance policy is the superior alternative for the majority of people. It is less expensive, offers better protection, and offers more flexibility than MPI insurance. Even if you believe a cheap policy is out of reach due to your health, it is worthwhile to obtain a free quote.

PMI vs. MPI

Keep in mind that mortgage insurance comes in various forms, and MPI is not the same as private mortgage insurance. A PMI is a sort of insurance that protects the owners of your house if you stop making payments on your mortgage loan. Many homeowners believe that their PMI will cover their mortgage payments if they pass away. This is a false assumption. PMI does not provide you with any protection as a borrower. If you are unable to pay your mortgage and have PMI, your home will most likely be foreclosed on. If you take a traditional loan with a down payment of less than 20%, you will almost certainly have to pay for PMI. You can cancel your PMI only when your equity exceeds 20%.

MPI, PMI, and MIP Differences

Mortgage protection insurance (MPI) is sometimes mistaken for PMI, or private mortgage insurance. While the lettering and words for these insurance products are nearly the same, they are not the same. As explained above, MPI protects you; PMI protects the lender that granted you your mortgage and is needed on conventional loans when the borrower puts less than 20% down.

To add to the confusion, MIP, which stands for mortgage insurance premium and relates to FHA loans, is another acronym. MIP, like PMI, protects the lender rather than the borrower. However, unlike PMI, you cannot eliminate MIP from an FHA loan unless the borrower makes a 10% down payment.

Mortgage Protection Insurance Advantages

Because your home is your most valuable possession, mortgage protection insurance can add an extra degree of security. Among the benefits are:

#1. Guaranteed acceptance

The majority of MPI policies are provided with “guaranteed acceptance.” This can be beneficial for persons who have health difficulties and either has to pay high rates for life insurance or have difficulty obtaining a policy.

#2. Peace of mind

The economy is currently in flux. If you find yourself out of work, and MPI policy that will make payments following a job loss can make a significant difference.

Mortgage Protection Insurance Disadvantages

Mortgage protection insurance is optional, and there are numerous reasons to consider foregoing it or instead choosing the flexibility of a standard life insurance policy.

#1. More money out of your pocket

The MPI premium increases the burden on your monthly budget.

#2. The benefits are limited

Paying for an MPI policy is generally not a prudent use of your money if your mortgage is virtually paid off or you purchased the property with cash from the sale of another home. That money might instead be saved in an emergency fund or retirement portfolio. Furthermore, if you want to make extra payments to pay off your mortgage sooner, MPI may not provide as much advantage because the loan payoff amount lowers as the mortgage is paid down. (However, some of the newest MPI policies have a level-death benefit, which means that the payouts will not diminish.)

#3. Alternatives that may be preferable

Because MPI is paid directly to your lender, it will not give any financial protection to your loved ones if you die other than paying off your mortgage. A life insurance policy may make more sense because the policy pays out to your beneficiaries, who can then determine how to distribute the money, whether to the mortgage or elsewhere. Life insurance premiums are often lower than MPI premiums for nonsmokers in good health.

MPI vs. FHA Mortgage Insurance

MPI is also not the same as the mortgage insurance paid on an FHA loan. When you apply for an FHA loan, you must pay both an upfront and monthly mortgage insurance fee. FHA insurance payments, like PMI, safeguard the lender against mortgage failure. As a homeowner, however, FHA mortgage insurance provides little protection.

Whether your loan contains PMI or FHA insurance, purchasing an MPI policy can be a good idea if you can’t afford a standard life insurance policy and want to ensure your home passes to your heirs. They will have the option to take over the payment, but it is not always possible to budget for an unexpected cost.

How Long Must You Have Mortgage Protection Insurance?

If you purchase mortgage protection insurance, you will continue to pay monthly premiums for the life of the policy. If you stop paying your premiums, your insurance company may cancel your benefits. You have the same right to cancel as you have with most other types of insurance. However, keep in mind that if you cancel, you will not receive any of the money you paid to your insurance provider.

Where Can I Purchase Mortgage Protection Insurance?

Do you believe MPI is a good fit for you? There are several ways to purchase a policy, including:

#1. Through your mortgage lender

Your mortgage lender may offer you an MPI policy when you close on your loan. If your lender does not offer MPI coverage, you may be able to ask a representative or your real estate agent for a referral to a company that does. MPI policies are not available through Rocket Mortgage®.

#2. Through a private insurance company

A number of private insurance companies offer MPI plans. The companies you’ll be able to work with will differ depending on your state.

#3. Through a life insurance company

Many companies that sell life insurance also sell MPI. If you have different types of insurance with a national insurance provider, you may be able to save money by bundling insurance coverage.

Regardless of where you buy MPI after you close on your financing, you should make getting a policy your top priority. Most insurance companies impose a time limit for purchasing a policy. If you miss your window, you may be unable to locate an MPI policy. If your loan has since been closed and you no longer qualify for MPI, consider shopping for a term life insurance policy instead.

Mortgage Protection Insurance Costs

Mortgage protection insurance policy costs are determined by a number of factors. Insurance companies will look at your mortgage loan balance and how much time is left on your loan term. They will examine your age, job, and overall risk level, just like a regular life insurance policy. In general, you should budget at least $50 per month for a bare-bones MPI policy.

Mortgage Life Insurance vs. Term Life Insurance

Term insurance and mortgage life insurance can help you pay down your mortgage. You must pay recurring premiums to maintain any form of insurance in force.

However, with mortgage life insurance, your mortgage lender is the policy’s beneficiary rather than the beneficiaries you name. If you die, your mortgage debt is paid to your lender. Your mortgage will be paid off, but the funds will not be distributed to your surviving or loved ones.

Furthermore, ordinary term insurance provides a fixed payout and a fixed premium for the duration of the policy. Mortgage life insurance premiums may remain constant, but the policy’s value falls over time as the balance of your mortgage drops.

The 2022 Best Mortgage Protection Insurance Companies

Here are our top selections for the finest term life mortgage protection insurance companies, based on product availability, consumer happiness, cost, and features.

  • Banner Life: The best option for young families.
  • USAA: Best for veterans.
  • State Farm: The best option for 30-year mortgages.
  • Nationwide: The best option for 15-year mortgages.
  • Protective: Beneficial for Reverse Mortgages:

Conclusion

If you own your home outright, MPI may be a waste of money. Furthermore, most people do not require MPI if they have adequate life insurance (even if those solicitations say otherwise). Consider getting more life insurance if you don’t have enough. Term life insurance will most likely be a more flexible and less expensive choice for people who qualify.

However, for those who are unable to obtain typical life insurance, MPI can provide vital protection that would otherwise be unavailable – and the additional cost may be worth it.

Before you make a decision, compare prices and speak with a local independent insurance agent to discover if you qualify for term life insurance.

Mortgage Protection Insurance FAQs

Is mortgage insurance cheaper than life insurance?

Mortgage protection insurance is typically more expensive than life insurance, but it is still reasonably cheap, costing around $100 or less per month, and is sold by mortgage companies, banks, or independent insurance companies.

What type of life insurance is most appropriate for mortgage protection?

Term life insurance
Many experts advise avoiding mortgage protection insurance in favor of term life insurance with a death benefit equal to the mortgage balance. Term life insurance is a preferable alternative for homeowners in good health.

How does mortgage insurance work in case of death?

Unlike typical life insurance, which pays you a death benefit to your beneficiaries when you die, mortgage life insurance only pays off a mortgage when the borrower dies as long as the loan is still outstanding. This is a significant benefit to your descendants if you die with a mortgage balance.

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