Mortgage Protection Insurance Guide: Is It Worth It?
Searching for a home comes with a host of new experiences, from touring new properties to scouting new neighborhoods. Many buyers focus so much on the house-hunting aspect of the process (thank you HGTV), they forget to ask important mortgage questions and do as much research as they should into aspects of purchasing a property – like asking about mortgage protection insurance.
Owning a home is a huge accomplishment and it comes with a lot of perks (like saying goodbye to those obnoxious upstairs neighbors), but it does come with more responsibility. The financial aspects of owning a piece of property can be overwhelming, especially if you’re the sole income provider in your house.
While no one really likes talking about death or the possibility of loss, failing to take the time to discuss your options could leave the family in a bind if tragedy strikes. However, preparation does not mean caving into fear tactics and jumping into more financial commitments (like insurance policies) without due diligence.
Once you purchase a home, you might be surprised to find yourself inundated with advertisements for all sorts of insurance policies. The kind that has you asking:
Do I have to have this type of coverage? How much is this going to cost? How do I choose the best one?
One of the most common things you'll get is advertisements offering mortgage protection, so, let's start there.
What is mortgage protection insurance?
Simply put, mortgage protection insurance (MPI) is designed to continue paying your family's mortgage payments in the event of your death. It's commonly mixed up with private mortgage insurance (PMI) but isn't the same thing.
MPI vs. PMI
Most buyers are introduced to private mortgage insurance, or the PMI, during the financing stage of their home buying process. The PMI protects the lender in case the borrower defaults on their loan. A PMI is required for borrowers who have less than 20% equity on their home. Typically, this insurance premium is added to the monthly mortgage payment. Borrowers can typically cancel this policy once they have accrued at least 20% equity in the home.
Mortgage protection insurance, or the MPI, is not the same thing. Sometimes referred to as mortgage protection life insurance, this type of policy protects the borrowers in the event that the covered individual dies.
The primary difference between the two is that a life insurance policy pays out to the family whereas a mortgage protection policy pays out to the lender.
In a PMI, the lender is the beneficiary (the insurance company pays them on the defaulted loan). With mortgage protection, the bank is also the beneficiary, but your family gets to keep the home. This type of policy is similar to a life insurance policy, which is why it's sometimes referred to as mortgage protection life insurance.
It's An Elective Coverage
As you're reviewing this information, it's essential that you understand: Mortgage protection insurance is an elective coverage. You do not legally have to purchase this type of insurance. We'll cover this in detail below, but for now, it's good to note.
Once you move into your new home, you may start getting letters from solicitors in very official looking envelopes trying to sell you on their product, but it’s completely optional, even if the letters look official and sound alarming.
How It Works
Mortgage protection insurance acts a lot like life insurance, as the policyholder makes premium payments on the policy.
The policy only remains in force so long as the premium payments are made and the policyholder continues to qualify for coverage. If an event triggers the payout clause in your policy (usually the death or injury of the policyholder), the insurance company pays out.
Like life insurance, there are several types of coverage with a mortgage protection policy.
Mortgage life insurance policies are term insurance policies, which means they last a set number of years before expiring. Typically the terms are similar to what you would find for a home loan (15 or 30 years).
Coverage Options for Mortgage Protection Insurance Policies
A level policy means that the death benefit stays the same over the entire life of the loan. Homeowners who have an interest-only loan may find this type of policy beneficial since the loan amount doesn't decrease initially.
In a decreasing structure, the benefit amount goes down over time to simulate the amount owed on the property (also going down as payments are made). The monthly payment may also decrease.
Mortgage Principal Coverage
When a policy is structured as a mortgage principal, the benefit amount reflects the total owed on your mortgage. If you make more payments and reduce the amount owed on your home, the benefit goes down accordingly. This offers the most flexibility in terms of benefit amount.
While this type of policy is structured much like life insurance, there's one major difference: if the policyholder dies, the insurance company makes a direct payment to the mortgage lender. That means, that even if your policy covers your home for more than you owe, you won't get the difference between the amount of your loan and your coverage.
How much does mortgage protection insurance cost?
The cost of your policy will vary depending on the value of your home, the terms of your coverage, and your age.
As an example, a 25-year-old woman would pay about $23 per month for a $100,000 policy. This does not include any added riders.
It's worth noting that State Farm has policy age limits. A person between 20 and 45 qualify for a 30-year policy, but anyone over 45 can only get a 15-year policy. The monthly payment could range from $15 per month to $100 or more per month, depending on your home loan. It's worth noting, that this type of insurance can be more expensive than most term life insurance policies.
Benefits of Having Mortgage Protection Insurance
1. Peace of Mind When Things Go Wrong
As a house is most often the most expensive investment buyers make, this type of insurance helps protect your family against the loss of that property. According to Experian, the average homeowner in the United States has a mortgage balance of around $201,811. That number is nearly 10% higher than in 2007 and could climb even more as housing prices rise in some cities.
Further, the average household carries a balance of $9,333 in consumer debt and 41% of all households have at least some type of credit card debt, according to a report by Value Penguin. Perhaps most startling is households with the lowest income average the highest amount of credit card debt, nearing $10,308.
Mortgage protection insurance could ensure that surviving family members continued to have a place to live while grieving and adjusting to a lower income.
2. Takes the Guesswork Out of Mortgage Costs
MPI can only be used toward mortgage payments, so there's no guesswork on whether or not there will be enough money to cover a payment. With other loans, falling behind on payments can seriously hurt your credit and could even lead to losing your property.
3. Easy to Qualify and Get Accepted
Another benefit is high acceptance rates. There are very few reasons why someone may be turned down for mortgage protection insurance making it an attractive option, especially those who may have trouble getting life insurance due to age or a pre-existing medical condition.
Potential Drawbacks to Consider
1. Coverage May Lapse
If you opt to purchase mortgage protection insurance with your home loan, the policy is tied directly to that loan. This is not always a drawback, however, if you sell the home and the coverage lapses, you'll have to get a new policy when you make another home purchase.
2. Premiums Can Be High
Like life insurance, mortgage protection insurance is tied to your age when you apply for the policy, so you could be paying a higher premium. It's also likely that any insurance tied directly to your mortgage may not be able to be canceled, so you could be stuck with the payment, even if you don't feel like you need it anymore.
3. Questionable Flexibility
Purchasing mortgage protection insurance through another company offers more flexibility, but may not offer perks your lender is willing to give you. It's important that you talk to your lender and other agents before making a purchase so you can figure out which option works best for your family.
Is Mortgage Protection Insurance Worth It?
You can choose to purchase mortgage protection insurance if you think the extra coverage is important, but you’re under no legal obligation to do so.
Deciding whether you need mortgage protection insurance will depend largely on your financial situation as well. Even though it isn't mandatory, it can provide some comfort as you continue to make house payments.
For most people, however, a term life insurance policy is a better option. It's generally more affordable, offers additional flexibility, and provides more protection.
Types of MPI Policies
A death-benefit policy is the most notable type of mortgage protection insurance but there are also other options.
Some companies offer an unemployment rider which ensures the mortgage payments are made if the policyholder becomes unemployed for a time.
If the policyholder is disabled, the insurance would ensure your mortgage payments are covered.
You may be able to purchase a long-term illness rider, which covers mortgage payments in the event that the policyholder becomes ill. Typically, the funds come from the total death benefit, so if the policyholder dies, the remainder of the death benefit would be used to pay the mortgage.
If you have a life insurance policy, you may not need mortgage protection insurance. However, if you have a lot of debt in addition to your mortgage, this type of policy could offer added protection.
There are a few options homeowners have when it comes to protecting their home.
Pay Off Your Home ASAP (Easiest)
One of the simplest (and least expensive) options is to just pay off the home as quickly as possible, which eliminates the need for mortgage protection insurance.
Another option is a life insurance policy. Life insurance offers a cash payout to the beneficiaries of a policy. Life insurance policies offer more flexibility because policyholders have more say over the length of their insurance coverage and the amount. Where a mortgage protection insurance policy can only ever cover the amount of a home loan, a life insurance policy allows for higher death benefits, which could allow your family to pay off the home and have money left over to take care of other expenses.
Term Life Insurance
Term life insurance policies are the most similar in structure as a mortgage protection, in that they offer coverage for a set number of years. Term life insurance is almost always less expensive than a whole life policy, which covers the policyholder until they reach age 99.5 or pass away.
How to Choose an MPI Provider
If you have decided that a mortgage protection insurance policy is something you want to do, you'll want to do some shopping around. Benefits and payments can vary widely from state to state and from company to company. So you'll need to do a bit of research before choosing a company to work with. Here are four things to consider:
1. Check with the lender who gave you your home loan
The same lender who approved your home loan may also offer mortgage protection insurance. And, while this may be a more affordable option, these policies tend to be less flexible. You may not even be able to get out of the policy until you pay off the house or sell your property.
2. Check with your car insurance company
Some car insurance companies offer this type of coverage alongside their other products. You may be able to bundle the deal with your car insurance and save some money.
3. Ask questions
Don't be afraid to ask questions when talking to lenders. Ask how long it takes for them to process a claim, how they'll handle the payout (if necessary), and if they will reduce your monthly rate as your loan total goes down.
4. Make sure you’re covered appropriately
Some policies will only pay your mortgage company if you die in an accident. That means your family could be out of luck if you die of natural causes. Clarify this point before you sign on the dotted line, to avoid possible complications down the line.
The Bottom Line
Mortgage protection insurance can be a great comfort to you and your family, but it may not be the best choice if you want coverage for other expenses. Even if some policies are more flexible now, it's important to thoroughly research each available option before committing to a policy. Talk to your family and examine your finances so you can move forward with confidence.