Mortgage disability insurance

Mortgage disability insurance — sometimes referred to as mortgage payment protection insurance — is a type of long-term disability insurance meant to specifically cover some or all of your mortgage payments if you can’t work due to illness or injury.

Mortgage disability insurance is offered as a standalone disability policy or as part of a broader mortgage protection insurance policy (MPI). MPI is essentially a term life insurance policy that covers your mortgage (yes, just your mortgage) if you die, whereas mortgage disability insurance pays your mortgage if you become disabled.

Given mortgage disability insurance is so narrow, people are generally better served by a long-term disability insurance policy, which offers more robust coverage.

How it works

1. Mortgage disability insurance is sometimes offered directly by your lender, but you can purchase a policy from an insurance provider or through an independent insurance agency or third-party, too. Co-borrowers on your mortgage, like a spouse or parent, are eligible to apply.
2. Mortgage disability insurance rates are determined by your age, mortgage amount (principal and interest), health and occupation. Riskier professions — think roofer or longshoremen — can lead to higher premiums.
3. Premiums get paid on an annual, semi-annual or quarterly basis. If you become disabled, coverage kicks in after a mandatory waiting period, usually around 30 to 60 days after your injury or diagnosis.
4. Mortgage disability coverage provides payments up to a certain amount each month (set in the policy) for its full term, which is generally one to three years. But just as with a standard MPI, those monthly payments go directly to your lender — meaning, yes, the funds are only good for paying your mortgage post-illness or injury.
5. Coverage generally decreases over time alongside the balance of your mortgage.

The pros & cons of mortgage disability insurance

While MPI policies touting disability coverage will consider your profession when determining your premiums, they’re otherwise approval guaranteed. That means you’ll qualify without going through the rigorous underwriting process associated with traditional life insurance or even disability insurance applications. That’s not necessarily a plus. Unless you’re in poor health, you’ll likely qualify for a lower premium — and better coverage in general — through a term-life insurance plan.

Having said that, if you are in poor health or work a high-risk job and can’t qualify for traditional life or disability insurance, mortgage disability insurance is, well, better than nothing.

Mortgage disability insurance riders

In most cases, mortgage disability insurance is the rider to a MPI policy, covering mortgage payments up to a certain amount in the event of illness or injury, not just death. A disability income rider entitles you to a monthly stipend if you’re unable to work due to illness or injury, while an accident-only disability income rider covers you only in cases of (you guessed it) accident.

Beyond that, some standard MPI riders exist. Keep in mind, these riders will up the total cost of the policy.

1. Return of Premium. This rider entitles you to a refund of the sum of your premium payments, minus any applicable fees, once the policy term has expired.
2. Involuntary Unemployment. This rider will waive your premium payments of up to a certain amount if you are involuntarily unemployed for up to a certain period of time.
3. Mortgage-related expenses. Mortgage disability insurance primarily covers principal and interest associated with your monthly payments, but you can sometimes add a rider to address additional mortgage-related expenses, like Homeowners Association fees or your homeowners insurance premium.

Other types of disability insurance

Long-term disability insurance — also known as LTD for short or sometimes income replacement insurance — covers up to 60% of your pre-tax monthly salary if you’re unable to work for a long period of time due to illness or injury. LTD policies typically pay to retirement age (65), but also offer benefit periods of two, five or ten years.

Short-term disability insurance, or STDI, is essentially a complement to LTD. It covers your income if you’re unable to work for short period of time due to illness or injury. STDI usually lasts for three to six months and covers about 80% of your gross income.

Supplemental disability insurance, or SDI, is meant to (you guessed it) supplement an employer-sponsored disability insurance plan. Most work group plans only cover 60% or less of your income.

Some people even purchase disability insurance and life insurance together, so if they become disabled, they can continue paying their life insurance premiums.

Not sure how much disability insurance coverage you need? We have more resources below that can help.