Mortgage Protection Insurance (MPI): What It Is and When to Buy It
As a homeowner, it’s likely important for you to provide your family with a sense of security in the event that you die unexpectedly or lose your ability to work. Purchasing a mortgage protection insurance policy can give you peace of mind by paying off your home loan if you’re no longer able to make payments.
However, this type of policy may not be right for everyone. Here’s what you need to know before shopping around.
Key takeaways
- Mortgage protection insurance pays off your remaining home loan balance if you die or become disabled.
- The insurance payout is made directly to the mortgage lender, rather than a beneficiary of your choice.
- Life insurance policies can sometimes achieve the same goal while allowing for more spending flexibility.
What is mortgage protection insurance?
Mortgage protection insurance (MPI) is designed to help your loved ones pay off your mortgage loan if you die or become disabled and can’t work. MPI policies are meant to help avoid negative outcomes — like mortgage default or foreclosure if you’re unable to keep up with your monthly mortgage payments — because of changes in your financial situation.
Also known as “mortgage life insurance,” these policies are often compared to other types of insurance policies, like life insurance or short-term and long-term disability insurance. However, there’s one big difference: Your loved ones won’t benefit directly from a mortgage protection insurance policy. Instead, your mortgage lender is the beneficiary — they’ll receive your policy’s payout.
It’s also important to note that MPI policies typically only cover your remaining loan balance and any interest charges. Additional costs like property taxes, homeowners insurance and homeowners association dues will still be your responsibility once your loan balance is paid off.
How MPI differs from other mortgage insurance policies
Many people have a tendency to confuse mortgage protection insurance with other types of insurance coverage. Here’s a look at how MPI stacks up against other policies.
- Homeowners insurance: Homeowners insurance is a type of insurance policy that mortgage lenders often require when you purchase a home. This type of policy protects your property and belongings from damage.
- Private mortgage insurance (PMI): PMI is a type of mortgage insurance that protects your mortgage lender if you stop making your mortgage payments. Conventional lenders typically require PMI if you make less than a 20% down payment.
- FHA mortgage insurance premiums (MIP): The Federal Housing Administration (FHA) imposes its own form of mortgage insurance on all of its loans. MIP is charged both upfront and annually.
Mortgage protection insurance vs. life insurance
Life insurance is generally thought to be more flexible than mortgage protection insurance. With a traditional life insurance policy, the beneficiary is often a loved one who receives the payout upon your death. They can then use the funds to cover expenses as they see fit, whether that’s paying off your mortgage or other costs.
In contrast, a mortgage protection insurance policy is more restrictive. It only pays off your mortgage loan, and the death benefit goes directly to your lender.
Pros and cons of mortgage protection insurance
| Pros | Cons |
|---|---|
No medical exam:Both permanent and term life insurance policies traditionally require a medical exam, which means you can be denied coverage if you have certain health conditions. MPI doesn't have the same requirements, so it can be a good option if you're unable to get a traditional life insurance policy. Peace of mind: You can rest assured knowing that one of your largest assets will be kept safe if you die or can no longer work. Simplicity: Since the insurance payout goes directly to your mortgage lender, your loved ones won't have to worry about scrambling to pay off your mortgage. | Shrinking coverage: As your mortgage balance decreases, so does your potential payout — even though your mortgage protection insurance premiums will likely stay the same. Lack of flexibility: MPI pays off your remaining mortgage balance and nothing else. Your loved ones won't have the same flexibility to cover other expenses as they would with a standard life insurance policy. More expensive: Since MPI has more flexible underwriting criteria (no medical exam) than most life insurance policies, coverage tends to be more expensive. |
Do you need mortgage protection insurance?
The answer to whether MPI is necessary will be different for everyone.
In most cases, it’s possible to achieve similar results with a traditional life insurance policy. As long as you purchase enough coverage, you’ll have the flexibility to pay off your mortgage and cover other costs, like funeral expenses or student loan debt.
However, if you’re unable to qualify for a standard life insurance policy or can’t afford sufficient coverage, mortgage protection insurance may be a good option. It can also be an asset if you ever worry about losing your income because of a disability.
Where to buy mortgage protection insurance
If you decide that buying a mortgage protection insurance policy is the right choice for you, here’s a closer look at where you can find coverage:
- Your mortgage lender: Many mortgage lenders offer MPI as part of their total package of services. Be sure to ask your loan servicer about opportunities to add on coverage.
- A life insurance provider: Often referred to as “mortgage life insurance,” many life insurance providers also offer MPI. Depending on the provider, it can be purchased separately or as part of another life insurance policy.
- An insurance broker or third-party insurance company: Insurance brokers and insurance companies may also sell MPI policies.
Frequently asked questions
Mortgage protection insurance only pays off your remaining mortgage balance, including any interest charges. It doesn’t account for any other recurring charges or end-of-life expenses.
The average cost of MPI is around $50 per month. However, the cost of your premium can vary widely depending on a number of factors — these can include your age, health, location, lifestyle, occupation and loan size.
Generally, younger, healthier individuals with smaller home loans pay less, while older people, those with larger loan balances and those with health conditions pay more.
Mortgage protection insurance and traditional life insurance policies can both be used to pay off your mortgage if you die. Life insurance is generally thought to be more flexible with its payout, but MPI may be simpler for your loved ones.
Here’s how to determine if MPI is right for you.