Buy a house and they will come: Offer upon offer upon offer for mortgage protection insurance. "Guarantee a mortgage-free home for your family!" they say. Sounds sweet, until you read the fine print and discover whatever it is they're selling is contingent on your death. If you're thinking that sounds vaguely like life insurance, well, give yourself a few snaps. Mortgage protection insurance is, in fact, a type of term life insurance that covers your monthly mortgage payments if you die. It's narrower than a traditional term life insurance policy, which covers a variety of expenses via a tax-free lump sum of cash paid (known as the death benefit) to a loved one after your death.
Confused? No worries. Let's break down the key differences between the two.
What is mortgage protection insurance?
Mortgage protection insurance, or MPI, covers your monthly mortgage payments — and only your monthly mortgage payments — if you die. It's meant to protect your family from having to sell or lose their home due to loss of your income.
Important side note: Mortgage protection insurance is different from private mortgage insurance (PMI), which protects your lender and is something you have to pay if you put less than 20% down on a home. (Mortgage protection insurance, conversely, is a policy you opt to buy.) PMI basically insures your mortgage lender won't lose all their money if your stop making payments on the loan.
What is term life insurance?
Broadly, term life insurance is a type of life insurance that covers you for a set period of time — as opposed to your whole life. That's permanent or whole life insurance.
Mortgage protection insurance vs. term life insurance
Given mortgage protection insurance is a type of term life insurance, the policies fundamentally operate the same way. You buy a policy for a set period of time, make monthly payments (premiums), and, in the event of the death, have a death benefit paid out to your beneficiary.
But, beyond that, there are a few big differences between MPI and traditional term life. The first one we mentioned already: Mortgage protection insurance only covers your mortgage, while regular term life insurance covers all of your expenses (up to your coverage limits, natch'.) What's preventing your family from using the policy's death benefit for other things, you ask? Simple: That money gets paid directly to your lender. Under a traditional term life policy, you get to name a beneficiary.
Also different: Mortgage insurance is tied to the balance on your mortgage — meaning the death benefit decreases in tandem, even though there's a good chance your premiums will remain the same. So, yeah, mortgage protection insurance is usually more expensive than standard term life. That's also due to the fact that applicants are exempt from having to take a paramedical exam. MPI is what's known as a guaranteed approval policy, meaning you can qualify without having to go through standard underwriting (read: medical exam).
Should you buy mortgage protection insurance or life insurance?
How do we put this bluntly? You're pretty much always better off with term life insurance.
For starters, it covers more than just your mortgage payments. Your beneficiary can essentially use the death benefit for whatever they need. But even beyond that, traditional term life policies offer a lot more flexibility. You can choose your benefit amount (as opposed to being restricted by the size of your mortgage). You have more options when it comes to setting the length of your policy. MPI usually comes in 15- or 30-year terms (you know, just like a mortgage), while term life typically touts 10-, 20- or 30-year terms, though shorter terms may also be available. Plus, MPI policies almost always cost more than traditional term life.
You can go here to compare life insurance quotes and find the best policy for you.
When should I buy mortgage protection insurance?
There is one-time to consider MPI: If you're health is poor and you can't qualify for a standard term life insurance policy. That's because, as you'll recall, you get to skip the medical exam that's a key part of term life underwriting. It'll cost you in premiums, obviously. No-medical exam life insurance is generally more expensive than standard life insurance, given the risk the carrier is taking insuring you sight unseen. But given how major mortgage debt can be — credit bureau Experian puts the national average mortgage debt is $196,014 — MPI is better than nothing.
How to shop for mortgage protection insurance
Having said that, you'll want to do your due diligence if you're considering MPI. Not all insurers are created equal and — in fact — some of those offers flooding your mailbox post-home purchase might not be legit or even reasonably affordable. Here are some steps to take when shopping for MPI.
- Pull term life insurance quotes anyway, even if you think your health puts an affordable policy out of reach. You might be in for a surprise.
- Shop around for MPI, if term life is truly out of the question. There's still generally a price differential across MPI providers and you'll want to get the best deal you absolutely can on your coverage.
- Run prospective insurers through Google to see if any complaints pop up and/or check any review that were posted. You can also check out the company's standing with the Better Business Bureau or A.M. Best.
- Be extra-wary of overly-aggressive offers. Remember, if it seems to good to be true (FREE MORTGAGE!!!), it probably is.
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