Mortgage disability insurance — sometimes referred to as mortgage payment protection insurance — is a type of insurance policy meant to cover some or all of your mortgage payments if you can't work due to illness or injury. It doesn’t cover other expenses though, so most people are generally better served by a long-term disability insurance policy, which offers more robust coverage.
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 life insurance policy that covers just your mortgage if you die, whereas mortgage disability insurance pays your mortgage if you become disabled. Most people are generally better served by a long-term disability insurance policy, which offers more robust coverage.
How mortgage disability insurance works
Regular disability insurance replaces your income if you can’t work, but disability insurance for a mortgage only pays you enough to cover your monthly mortgage payment.
You can take out mortgage insurance from your mortgage lender when you buy a house, or you can purchase a policy from an insurance company, agency, or marketplace. Co-borrowers on your mortgage, like a spouse or parent, are also eligible to apply.
When you become disabled, mortgage disability insurance covers up to a certain amount each month (set in the policy) towards your mortgage payment, for the policy's full benefit term, which is generally one to three years. The payments go directly to your lender (unlike disability benefits from a traditional long-term policy). The mortgage protection insurance benefit amount can also decrease over time, since it's designed to pay off your loan balance, which should be shrinking over the lifetime of the loan.
The cost of mortgage disability insurance is based on your age, your loan balance (principal and interest), health, and occupation. Having a riskier profession — think construction worker or longshoreman — can lead to higher rates.
Premiums for disability mortgage insurance are paid on an annual, semi-annual, or quarterly basis. When you become disabled, coverage for mortgage disability insurance kicks in after a mandatory waiting period, or elimination period, usually around 30 to 60 days after your injury or diagnosis.
The pros & cons of mortgage disability insurance
If you are in poor health or work a high-risk job and can't qualify for traditional life insurance or disability insurance, then mortgage disability insurance is worth considering.
Mortgage life and disability insurance policies consider your profession when determining your premiums, but you don’t have to go through a rigorous underwriting process or medical exam. That means it’s easier to get approved for mortgage protection insurance compared to a traditional life or disability insurance policy.
However, if you don’t have health issues, you'll likely qualify for lower premiums and better coverage when you get a term life insurance plan. The death benefit can also be used for any expenses, not just mortgage payments.
Similarly, long-term disability benefits — which can replace up to 60% of your income — can be used however you want. Mortgage disability insurance benefits, on the other hand, only cover mortgage payments and nothing else.
Mortgage disability insurance riders
In most cases, you get mortgage disability insurance coverage as a rider to a mortgage protection policy, covering mortgage payments up to a certain amount in the event of illness or injury, not just death.
Mortgage disability insurance primarily covers principal and interest associated with your monthly payments, but you can sometimes add a rider to extend your coverage for additional mortgage-related expenses, like home insurance premiums, homeowners association (HOA) fees, and property taxes. These riders can increase the total cost of the policy.
Other types of disability insurance
Since mortgage disability insurance only covers your mortgage balance, here are a few different types of disability insurance that you might consider instead.
Supplemental disability insurance is meant to supplement an employer-sponsored disability insurance plan. Group disability benefits are often taxed, and policies rarely offer enough coverage.
Short-term disability insurance covers your income if you're unable to work for a short period of time due to illness or injury. Short-term disability coverage usually lasts for three to six months and can complement your long-term disability insurance.
Long-term disability 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. Long-term disability insurance can pay you benefits until you retire, but it also offers benefit periods of two, five, or 10 years.
Not sure how much disability insurance coverage you need? A licensed agent at Policygenius can help you choose the best policy for your situation. Some people even purchase disability insurance and life insurance together, so if they become disabled, they can continue paying their life insurance premiums.