What is mortgage protection insurance?

Mortgage protection insurance definition

MPI is an optional policy available to borrowers that pays off the remaining mortgage balance should the policyholder or spouse pass away. It’s a form of life insurance because policyholders pay premiums while alive and it only pays out in the event of death (or other circumstances, depending on the policy), which is why you might see it called mortgage protection life insurance.

The option to purchase MPI usually appears after closing on a mortgage. Solicitations often come in the mail from insurance companies, but you can purchase policies from lenders, private insurance companies or life insurance agents. Providers often put limits on how long you can wait after closing to purchase a policy and what age you can be at the time of purchase.

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MPI vs. traditional life insurance

Whether you have a term life or whole life insurance policy, if you pass away, your heirs receive the death benefit. With an MPI policy, the provider sends the payout directly to the lender and the funds are only available for the purpose of mortgage payoff, which makes the lender the beneficiary — not your heirs.

With MPI, the mortgage lender is the beneficiary, not your heirs.

Unlike term and whole life insurance policies, MPI has a guaranteed acceptance. There is no medical exam or underwriting with MPI. While this makes it more appealing for someone with medical issues or a dangerous job, it also means the premiums with MPI are typically higher.

“Most people in normal health can qualify for better priced coverage utilizing traditional life insurance [versus MPI]. We see rates come back 25% to 50% lower oftentimes compared to a mortgage protection insurance policy,” explained Matt Schmidt, the co-founder of Diabetes Life Solutions and a licensed insurance agent.

Lastly, life insurance policies typically hold their value or possibly increase in value over time, whereas an MPI policy decreases in value since your mortgage balance is decreasing.

How does MPI work?

An MPI policy is somewhat similar to term life insurance in how it works. You purchase the policy and pay the premium during a defined term, and once the term ends, the coverage is over. And since the beneficiary is the lender, if you pass away before paying off your mortgage but during the coverage term, the provider pays off the remaining mortgage balance directly to the lender.

You can cancel your MPI policy at any time, but bear in mind you won’t receive any of the money back that you paid toward your premiums.

What does MPI cover?

An MPI policy only covers the payoff of your existing mortgage if a balance remains and you pass away while the policy is still active. There are some MPI policies available that provide a mortgage payout in the event of a disability or job loss.

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Pros and cons of MPI

There are compelling features worth considering with MPI policies, but there are drawbacks, too.

Keep in mind, “certain life insurance carriers offer free riders such as chronic, critical, and terminal illness riders. Having a policy where you could access part of the death benefit if suffering from a health issue may be advantageous in the future,” added Schmidt.

If you do choose to purchase an MPI policy, the best strategy is to shop around and compare policy options and providers, so you know you’re selecting the best policy for your budget.

When to get MPI

There are a couple of circumstances where MPI might make financial sense for someone.

First, if you’re someone with a risky occupation, health concerns or having difficulties obtaining a life insurance policy, then you will find the approval process for an MPI is much easier versus the underwriting process for other insurance products. With no medical exam, the policy includes guaranteed acceptance, and coverage should continue as long as you pay the premiums.

MPI might also make sense if your top priority is paying off a mortgage in the event of death or disability. If the premium costs work with your budget and your mortgage is the priority for your beneficiaries, then you might benefit from this type of policy.

Just remember that adding an MPI policy is one more premium coming out of your budget, and if you’re seeking more than just mortgage payoff, that premium amount could go toward a more comprehensive policy such as a term life insurance plan.

Bottom line

A mortgage is an enormous expense, and it’s natural to think about how your spouse or partner would cover the cost if something were to happen to you, or vice versa. While mortgage protection insurance is one option, you may find a traditional life insurance policy offers greater flexibility if you qualify for coverage. If you’re unsure which one is the best choice, you can speak with a trusted insurance professional.