Generally speaking, mortgage protection insurance (MPI) is defined as a type of life insurance designed to pay off your mortgage if you were to pass away before your mortgage is paid in full.
Like numerous other insurances, you’ll pay each month a premium to your mortgage protection insurer. In exchange for these payments, your mortgage protection provider will, in the event of your death, payout financial benefits directly to the lender(s) involved in the purchase of your home either in the form of a predetermined number of mortgage payments or for the full remaining balance of your mortgage, depending on the provisions of your policy.
It is stating the obvious that mortgage protection insurance has nothing to do with homeowners’ insurance, which protects your property against loss or damage.
Mortgage protection insurance is also different from private mortgage insurance (PMI), which is a type of mortgage insurance you are required to pay for if you have a conventional loan. Like mortgage protection insurance, private mortgage insurance is designed to protect the lender not you if you stop making payments on your loan.
Lastly, mortgage protection insurance, shall not be confused with mortgage insurance premium (MIP) which applies to FHA loans. Once again, the mortgage insurance premium is designed to protect the lender, not the borrower if he/she defaults on his/ her payments.
On the contrary of homeowners’ insurance, private mortgage insurance for conventional loans (PMI) and, mortgage insurance premium for FHA loans, mortgage protection insurance is optional.
Therefore, in order to allow you to make an informed decision on whether or not a mortgage protection insurance (MPI) should be an alternative to consider, you will find below a recap of the plus and minus of mortgage protection insurance, for informational purposes only.
1). The benefits of mortgage protection insurance
1-1). One of the biggest benefits of mortgage protection insurance is its convenience. After your passing, the check to pay off the mortgage or part of it, depending on the terms of your policy, will go directly from your mortgage protection insurance to the lender(s).
1-2). If you’re denied term life insurance or whole life insurance for medical reasons mortgage life insurance may be an option to financially protect your home as it usually offers guaranteed approval with no medical exams or lab tests.
1-3). Some mortgage protection insurance policies also cover mortgage payments if you are working in a high-risk environment which might disqualify you to subscribe to a term life insurance.
1-4). Some mortgage protection insurance policies also cover mortgage payments (usually for a limited period of time) if you become disabled or lose your job.
1-5). Mortgage protection coverage can be used as a supplement to an individual life insurance policy. For example, if your mortgage is paid off with the money from your mortgage protection insurance, then your family could use all the benefits from your term or whole life insurance policy for bills and other expenses after your passing.
2). The limitations of mortgage protection insurance
2-1). A mortgage protection insurance policy locks your loved ones into paying off the mortgage, even if other bills and needs are more pressing. In other words, your loved ones upon your death have no other choice than to use the money from the mortgage protection insurance to pay off the mortgage. On the contrary, the total amount of a term life insurance coverage will be paid out to your beneficiaries in a lump sum – allowing them to use the funds as they wish.
2-2). As your mortgage balance declines, the amount that the mortgage protection insurance company might pay out declines with it. At the same time, your mortgage protection insurance premiums will stay the same. That means you’ll end up paying the same cost for less coverage over time. As a result, if your mortgage is nearly paid off or if you paid for your home with proceeds from the sale of another home, paying for a mortgage protection insurance policy might not be the best use of your money.
2-3). Mortgage protection insurance policies, often have more restrictive age limits than term life insurance policies. For example, some mortgage protection insurers won’t issue a 30-year MPI policy to anyone over age 45 considering that older applicants are more likely to collect on policies.
2-4) Most mortgage protection insurance companies also set time limits on when you can purchase a mortgage protection insurance policy. For example, many mortgage protection insurance providers will require you to obtain your MPI insurance policy within to 2 to 5 years of buying your home.
3). Whom to contact to get mortgage protection insurance
The main providers of mortgage protection insurances are:
3-1). Mortgage lender: Your home mortgage lender may offer a mortgage protection insurance policy at the time of closing on your loan.
3-2). Private insurance company: Numerous private insurance companies offer mortgage protection insurance policies to pick from, depending on your residential location.
3-3). Life insurance provider: Many life insurance policy providers also offer mortgage protection insurance packages. Note that if you currently have other forms of insurance with a national provider (health, auto, etc.), you may be able to save on your mortgage protection insurance by bundling your insurance programs together.
As a conclusion, one can say that the subscription of a mortgage protection insurance is mostly seek by homeowners who want the comfort and peace of mind that their surviving family members will be able to keep his/her home after his/her passing. That said, the purchase of a mortgage protection insurance plan depends on each individual personal and household circumstances.
Hope this helps. Should you have any questions feel free to contact me.
Sources:https://www.grangeinsurance.com;https://www.nerdwallet.com;https://www.bankrate.com;https://www.quickenloans.com