What is mortgage protection insurance?
One of the biggest financial commitments you can make in life is the purchase of a home. But have you stopped to think about how your family could continue making mortgage payments if you or your spouse passed away or became disabled and unable to work?
Mortgage protection insurance (MPI) is an insurance policy that pays off your mortgage under certain circumstances. But before you sign up, there are a number of considerations you should review, including what is and isn’t covered with MPI and how the policy works.
- MPI pays off a mortgage due to a devastating loss, such as death or disability.
- The payout goes directly to the lender instead of the survivors.
- An MPI policy decreases in value over time as the mortgage balance decreases.
- In some cases, a homeowner may be better off purchasing another life insurance policy or savings strategy versus relying on MPI.
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.
- Qualification: MPI is typically easier to qualify for versus life insurance, since it doesn’t require a medical exam or rigorous underwriting process.
- Streamlined payout process: The payout goes directly to your mortgage lender, so no one in your family has to deal with handling the payoff.
- Other options available: Some MPI policies offer a mortgage payoff with other conditions besides death, such as payoff due to disability or job loss.
- Payout skips the family: Since the mortgage payoff goes to the lender, you’ll need a separate policy for funeral costs, taxes, bills or other big expenses.
- Decreasing coverage over time: The value of the policy declines as the balance of your mortgage declines, yet your premium amount remains the same over the life of the policy.
- More restrictions, less flexibility: Some providers restrict policies to anyone over a certain age or limit the terms of a mortgage payoff.
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.
What is the difference between MPI and PMI?
Though similar sounding, MPI and private mortgage insurance (PMI) are two different products.
MPI provides a mortgage payoff directly to the lender if you or your spouse die (or whatever the conditions are of the policy) and is optional for the buyer.
PMI is a monthly fee the borrower pays each month to the lender to lessen the lender’s risk if there is nonpayment and is typically required when there is less than a 20% down payment.
Is MPI required by law?
There is no requirement to purchase any MPI policy. Your lender may strongly recommend it, but it’s an optional coverage for the borrower.
How much does MPI cost?
A 30-year-old with a $450,000 balance on a 30-year mortgage can expect to pay roughly $54 a month, according to sample rates estimated by the Department of Veterans Affairs VMLI calculator. The exact amount of an MPI policy depends on your age, the duration of the mortgage, the balance of your mortgage and the amount of requested coverage.
What happens to my MPI policy if I sell my home?
If you purchase an MPI policy and decide to sell your home, you need to notify the provider right away. An MPI policy is based on your primary residence, so if there is a change to this (from moving, refinancing, transferring lenders or selling), it will impact your policy.
- Consumer Financial Protection Bureau, “ What is private mortgage insurance? ” Accessed June 7, 2023.
- Department of Veterans Affairs, VA Life Insurance (VALife) VMLI Premium Calculator . Accessed June 7, 2023.
- Department of Veterans Affairs, “ Veterans’ Mortgage Life Insurance (VMLI) .” Accessed June 7, 2023.
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