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byPatrick Hanzel, CFP®
Patrick Hanzel, CFP®
CERTIFIED FINANCIAL PLANNER™ & Advanced Planning Team Lead
Updated January 29, 2021|7 min read
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Life insurance can be used to provide financial protection for everyday expenses, retirement costs, education, and more. But one of the most common reasons for having life insurance is so that loved ones can continue paying the mortgage and stay in their home, even after you're gone. Your home is often your biggest and longest-lasting debt, so it's important to have a policy with enough coverage for your family to cover the cost of staying in your home.
A standard term life insurance policy is usually enough for this, but there's another type of life insurance called mortgage protection insurance, or MPI, that's tied to your mortgage. For most people, the restrictions of an MPI policy don't make it a better option than your average term life policy.
Mortgage protection insurance covers your mortgage payments if you die before paying off your balance
The death benefit for mortgage protection insurance is paid out to your mortgage company or lender, not your family
Because of mortgage protection insurance’s limited scope and high cost, term life insurance is a better coverage option for most people
Mortgage protection insurance is basically what it sounds like: life insurance that’s designed to protect your family from burdensome mortgage payments if the primary breadwinner is no longer around to provide an income.
Mortgage protection insurance is broadly similar to term life insurance in how it works. You buy a policy, pay regular premiums, and at the end of the policy term, your coverage 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 from term life insurance: your family members aren’t your beneficiaries and the death benefit amount decreases over time.
First, the mortgage company or lender is 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 payments.
The term lengths for term life insurance policies are fairly flexible; you can usually choose term lengths in five- or ten-year intervals, and some insurance companies 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.
If you’re worried about leaving loved ones with a mortgage payment if you die but can’t get a competitive life insurance rate due to age or health issues, a mortgage protection insurance policy may help. Look into different mortgage protection insurance companies before signing up with your mortgage lender to make sure you're getting the best deal. But first, you should see if you’re eligible for a traditional term life insurance policy.
For most people, a term life insurance policy is the better option. It’s more affordable, provides more protection, and allows for more flexibility than most mortgage protection insurance companies do. And even if you think an affordable policy is out of reach because of your health, it’s worth getting a free quote — 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 a covered peril, you won’t necessarily lose your investment.
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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 from a traditional term policy, it can be overwhelming knowing how to allocate it appropriately.
Mortgage protection insurance takes the guesswork out of how to spend the money. 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. If you die, your mortgage protection insurance payments go towards your monthly mortgage payments so your family doesn’t lose their home.
It also has the benefit of allowing the policyholder to 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 life insurance is different from private mortgage insurance, or PMI. 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 if 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, plus other expenses.
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 for an applicant in excellent health, generally, 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 paying the same premium rates for less coverage.
And the lack of flexibility doesn’t end there. The coverage amounts, limited terms, and age restrictions all contribute to a strict policy that doesn’t take into account the numerous changes you and your family may go through during the course of the policy. Overall, mortgage protection insurance's cost isn't worth the relatively limited protection.
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 offers more flexibility than a mortgage protection life insurance does.
Term life insurance provides your beneficiaries (who can be your family, other loved ones, or even institutions) a tax-free, lump-sum of cash that they can use to pay off a mortgage, pay off other loans, save for retirement and college, or just cover day-to-day bills.
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 policies offered by most mortgage protection insurance companies and much more expensive than a term life insurance policy. Permanent coverage is 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.
Mortgage protection insurance protects your family’s housing if you die prematurely and haven't paid off your mortgage. But because it doesn’t cover other vital costs, such as bills and everyday expenses, it’s best to buy a traditional term life insurance policy instead. If you are ineligible for term coverage, a mortgage protection insurance plan is a good backup.
Mortgage protection insurance is a type of life insurance that covers your mortgage payments if you die prematurely. You may need it if anyone relies on you for housing, but most people find a term life insurance policy offers more affordability and covers more expenses.
Mortgage protection insurance is generally double the cost of a comparable term life insurance policy.
For most people, mortgage protection insurance isn’t worth the high cost and term life insurance is a better option. But if you’re ineligible for traditional life insurance, a mortgage protection plan offers worthwhile financial protection.