What Is Mortgage Life and Disability Insurance and Who Needs It?
What happens if you can’t meet your mortgage payments? In many cases, you will be forced to default on your home loan and face foreclosure on your property. However, in some cases a mortgage protection insurance policy may come to your aid. Mortgage lenders will often try to sell you a mortgage protection policy (also called mortgage life insurance) as a part of your new mortgage. Are these mortgage protection insurance policies really worth the cost, or is it just another instance of banks looking out for their own interests?
Table of Contents
- 1 What Is Mortgage Protection Insurance (MPI)?
- 2 Mortgage Protection Insurance vs Private Mortgage Insurance
- 3 Do I Need Mortgage Protection Insurance?
- 4 Alternatives to Mortgage Protection Insurance
What Is Mortgage Protection Insurance (MPI)?
Mortgage protection insurance (MPI) is a class of insurance policies designed to protect your mortgage payment responsibilities against various disasters that may prevent you from meeting them. Each MPI policy is different and, if you do decide to get MPI, you should carefully review your policy to find out what is and what is not covered.
In general, however, many MPI policies will cover mortgage payments in some of the following scenarios:
- Homeowner’s Death: If you or the person responsible for paying the mortgage were to die, MPI would step in, sending a check directly to your lender and paying off the home loan so your loved ones don’t have to.
- Disability: If you were to suffer a disability that left you unable to work, some MPI policies would take on the mortgage responsibilities on your behalf.
- Job Loss: Some MPI policies come with job loss protection. If you suddenly lost your job, leaving you without a fixed income to make your mortgage payments, your MPI would cover your mortgage payments for a set period of time so that you could get back on your feet and find a new job.
Mortgage Protection Insurance Companies
Since mortgages are often offered by big lenders such as banks and credit unions, these very same financial institutions will sometimes be the ones to include a MPI policy as part of your mortgage. However, as with any almost any lucrative service, there are also private lenders out there who will keep an eye on mortgage records (which are a matter of public record) and mail out MPI offers to new homeowners on a regular basis.
Mortgage Protection Insurance Costs
As with any insurance policy, the cost of MPI varies depending on your level of risk as a policyholder and the cost of what you are insuring. For these reasons, you can generally expect the cost of mortgage protection insurance to go up if a borrower is older, or if the house that the policy covers is more expensive. Given that, State Farm starts their MPI policy costs at $21.58 per month for a 15 year term and $22.45 a month for a 30 year term. In addition to borrower age and home value, getting riders for extra coverage will also make your policy cost go up.
Mortgage Protection Insurance vs Private Mortgage Insurance
Be careful not to confuse mortgage protection insurance (MPI) for private mortgage insurance (PMI). MPI protects you from the responsibilities of a mortgage payment in certain cases, but PMI exists solely to help lenders. Whereas MPI can save you or your family from foreclosure in the event of death, disability, or job loss, PMI will simply cover the cost of your mortgage to the bank if you default, without absolving you of any of your responsibilities as a homeowner. The short version is: avoid PMI whenever possible, but consider getting an MPI policy in certain cases.
Do I Need Mortgage Protection Insurance?
If you’re a homeowner, then you can probably expect to get MPI offers in the mail every so often. The big question is: should you accept them?
As with any insurance policy, companies will often try to scare you into getting more coverage than you really need. Just as car insurance salespeople will use scary scenarios around collisions to upsell you on more coverage, so too will MPI companies try to convince you that the possibility of debt is a little scarier than it actually is. This isn’t to say that MPI policies are useless and that no one should get them, but they aren’t for everyone. In general, you should stay away from an MPI policy as long as:
- You are young. MPI policies are most important when they cover against death, but this is less of a risk for young people.
- You are healthy. If your doctor thinks that you’re in good health, then you’re not very likely to make use of death or disability coverage on an MPI policy.
- You are in a two-income household. If your spouse collects an income, then your family is in a much better position to pay the mortgage in case you die, become disabled, or lose your job.
- If you are unable to pay your mortgage for reasons within your MPI policy’s coverage, then you don’t have to worry.
- Single-income households won’t be left behind if the sole breadwinner passes away.
- Compared to other forms of insurance, barebones MPI policies are generally relatively cheap and easy to qualify for.
- Over time, MPI policies will pay out less and less. Essentially, those who are most likely to benefit from MPI (older homeowners) are also likely to receive the smallest benefit, since they may already have most of their mortgage paid off.
- MPI can double up on things that may already be covered by other forms of insurance, such as a standard life insurance policy.
- Payments go straight to your lender, leaving nothing else to support your family if you pass away.
Alternatives to Mortgage Protection Insurance
Mortgage protection insurance covers a very specific responsibility under a very particular set of circumstances. However, there are also more general forms of insurance that can cover the same things as an MPI policy and more, sometimes at lower premiums.
Term Life Insurance
Term life insurance will provide a payout to your surviving dependents in the event of your death within a specified time period. This payout can be used for many things, including mortgage payments after your death.
Whole Life Insurance
Unlike term life insurance, whole life insurance will pay out a death benefit to your surviving dependents no matter when you pass away. Essentially, whole life insurance is like term life insurance, but the term lasts for your entire life. Once again, death benefits can be used to make mortgage payments in addition to other expenses following your death.
Disability insurance will provide a payout in the event that you become disabled and unable to work. This payout can be used to cover mortgage payments plus any other responsibilities that have become more difficulty to meet with your disability.
Mortgage protection insurance can help to cover the cost of your mortgage in case you pass away, become disabled, or lose your job. However, the benefit is often smaller for those who need it most and there are other forms of insurance that can do the work of an MPI policy, so be sure to weigh your options carefully before committing to MPI.
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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated August 14, 2018. It was originally published July 18, 2018.