Two products that can both pay off your mortgage.
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Mortgage protection insurance is 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 (known as the death benefit) paid to a loved one after your death.
Although it's technically a type of term life insurance, it differs in its function. A traditional term life insurance policy is usually a better fit for most people, but there are instances when a mortgage protection insurance policy is useful.
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 the 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 may opt to buy. PMI basically ensures your mortgage lender won't lose all their money if you stop making payments on the loan.
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.
Read more about the differences between term life and whole life.
Given that 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 your 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).
The largest difference is who the funds get paid to upon your death. With mortgage protection insurance, the 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.
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.
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For most people, term life insurance is a better option than mortgage protection insurance. Here’s why:
Term life covers more than just your mortgage payments Your beneficiaries 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 with term life With mortgage protection insurance, you are 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 (just like a mortgage), while term life policies have shorter or longer terms depending on your needs.
Cost savings MPI policies almost always cost more than traditional term life.
There is one situation when to consider mortgage protection insurance could be the better option: if you can't qualify for a standard term life insurance policy. That's because with MPI you get to skip the medical exam that's a key part of term life underwriting. It'll cost you in premiums, because 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, MPI is better than nothing.
You can go here to compare life insurance quotes and find the best policy for you.
If you're considering MPI, it’s important to research carriers. 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, it probably is.
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