Cost & Coverage
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Mortgage protection life insurance is basically what it sounds like: life insurance that’s designed to protect your family from burdensome mortgage payments if the primary breadwinner isn’t around to provide an income any longer.
Mortgage insurance is broadly similar to other types of term life insurance in how it works. You buy a policy, pay regular premiums, and, at the end of the policy term, it ends. If you die during the term of the policy, a death benefit is paid out to your beneficiaries.
However, mortgage protection insurance has a few key differences.
First, the mortgage company or lender is usually the beneficiary in a mortgage protection insurance policy. That means the death benefit bypasses your family and goes straight to the mortgage lender to pay off the mortgage.
And speaking of the death benefit, because it’s used to pay off your mortgage balance in most cases, it usually decreases after the first five years of coverage to match your remaining mortgage. This is unlike other term life insurance policies, where the death benefit stays constant unless you make changes to the policy.
Finally, the term lengths for term life insurance policies are usually fairly flexible; you can usually choose term lengths in five- or ten-year intervals, and some carriers even allow custom term lengths. However, mortgage protection insurance is usually locked in at the same length of time as your mortgage itself: 15 years or 30 years. Your term length may also be limited by your age; for instance, State Farm’s mortgage protection insurance limits you to a 15-year term if you’re above age 45.
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Mortgage protection insurance highlights one of the biggest debts a person can have, and earmarks money specifically for it. If your family receives a lump sum of money, it can be overwhelming knowing how to allocate it appropriately.
Mortgage protection insurance takes the guesswork out of it. Because it’s matched up to the mortgage balance, and the money will go only toward that, there’s no worrying that there won’t be enough to cover the remaining mortgage. As with other types of loans, falling behind on your payments could seriously hurt your credit, and may even lead to losing your home. If you die, your mortgage protection insurance will continue making your monthly payments until the death benefit runs out.
It also has the benefit of allowing the policyholder to potentially avoid the underwriting process. Since life insurance rates are largely determined by the health of the applicant, skipping underwriting could result in higher insurance premiums, but it can be worthwhile if poor health would raise the premiums of a standard term life insurance policy even more.
(Note that mortgage protection insurance, which is sometimes abbreviated to MPI, is different from PMI, or private mortgage insurance. Lenders require borrowers to purchase PMI when the borrower makes a down payment of 20% or less and tack on the premiums to your regular mortgage balance. Private mortgage insurance protects the lender in the event that you default, but it won’t help your family if you die before your mortgage is paid off.)
The main drawback of a mortgage protection insurance policy is its narrow scope. Being able to cover mortgage payments is great, but you’re doing so at the expense of your family’s other debts and bills. A regular term life insurance policy allows you to cover your mortgage and then some.
For anyone looking for the most affordable term life insurance options, mortgage protection insurance isn’t your best bet. It’s more expensive than a typical term life insurance policy; a $250,000, 30-year term mortgage protection insurance policy through State Farm, for an applicant in excellent health, is more than double a comparable term life insurance policy.
The decreasing death benefit amount is also a limiting factor. Because the death benefit is matched to your mortgage balance, it doesn’t give you much flexibility if things change in your life. Worse, policies are usually level premium, meaning that, as time goes on, you’re literally paying the same for less.
And the lack of flexibility doesn’t end there. The coverage amounts, limited terms, and potential age restrictions all contribute to a strict policy that doesn’t take into account the numerous changes you and your family will go through during the course of the policy. Overall, mortgage protection insurance's cost isn't worth the relatively limited protection.
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The most popular – and best – alternative to mortgage protection insurance is a standard term life insurance policy. It’s like a mortgage protection insurance policy in that you pay for the policy for a certain amount of time, but it doesn’t come with all of the strings attached that mortgage protection insurance does.
Term life insurance provides your beneficiaries (who can be your family, other loved ones, or even institutions) a tax-free, lump sum amount of cash that they can use for whatever they need. (Annuities are also available.) That might mean paying off a mortgage, but it could also mean other loans, saving for retirement and college, or just paying day-to-day bills to help make ends meet.
Other types of permanent life insurance are also alternatives; they last for the policyholder’s entire life, as long as premiums are paid, rather than expiring. However, permanent life insurance policies are more expensive than mortgage protection insurance policies, and much more expensive than a term life insurance policy, and are typically more complicated than what the average person needs for their financial safety net.
Because mortgage protection insurance is a type of term life insurance, you can get many of the same add-on features, or “riders,” as you can with a traditional term life insurance policy, such as:
When the policy term has ended, you will be refunded the sum of your premium payments, minus any applicable fees.
If you become disabled, premium payments will be temporarily waived until you have recovered.
However, applicants can also get additional coverage riders. Because mortgage protection insurance limits the term length of policies to better match with mortgage terms, you won’t have the flexibility of a traditional term life insurance policy. You can choose to add 15 or 30 year riders to increase the term of your policy, if needed.
If you’re unable to get a competitive life insurance rate due to health issues, a mortgage protection insurance policy may help. We’ve advocated for other no-medical exam policies in the past for similar special circumstances. But look into mortgage protection insurance companies before signing up with your mortgage lender right away to make sure you're getting the best deal.
However, for most people who need life insurance to cover more than just their mortgage, a term life insurance policy is the better option. It’s more affordable, provides more protection, and allows for more flexibility. And even if you think an affordable policy is out of reach because of your health, it’s worth getting a free quote because you’ll probably be surprised at how competitive your term life insurance rates can be.
Additionally, because your house is such a major investment, you’ll probably want to keep protecting it while you’re alive. A homeowners insurance policy protects the structure of your home and any attached property as well as the contents inside of the home, even if you’re still making mortgage payments. That way, if you lose your home or if it’s seriously damaged because of covered peril, you won’t necessarily lose your investment.
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