Odds are if you’re paying a mortgage, you’ve received offers for mortgage protection insurance. It comes in several forms, but it typically covers your mortgage if you lose your job or become disabled, or it pays off your mortgage when you die.
Would you benefit from mortgage protection insurance? Or is it just another way for your mortgage company to siphon extra money out of your wallet each month while protecting itself upon your death?
The answer depends on your health, financial situation and what you want to happen when you die. Here are the pros and cons of mortgage protection insurance, along with tips for getting the best policy at the right price.
What is mortgage protection insurance?
Mortgage protection insurance, or MPI, is also called mortgage payment protection insurance, or MPPI. It’s simply life insurance that pays your mortgage if a certain event, such as death, disability or job loss occurs, explains Kevin M. Lynch, an assistant professor of insurance at The American College in Bryn Mawr, Pa. The cost depends on factors such as the amount of your mortgage and your age and health. For disability MPI, costs also vary depending on your occupation.
Many people confuse MPI with private mortgage insurance, or PMI. “You’re required by law to get PMI if you put less than 20 percent down to purchase your home,” says Christopher Ketcham, senior director of knowledge resources at the Insurance Institute of America in Malvern, Pa. “It has nothing to do with disability, job loss, or death. It pays the bank if you’re foreclosed on.”
If you purchase mortgage protection insurance that pays off your mortgage when you die, the insurance company will send a check directly to your mortgage company, leaving your heirs with a home unencumbered by a mortgage. Payments will also go directly to your mortgage company if your policy pays upon disability or job loss, but only for a certain period, typically a year or two, and there may be a waiting period before payments kick in, says Ketcham. Disability or job-loss policies pay only the principal and interest on your mortgage. But you may be able to get a rider to cover other mortgage-related expenses like homeowners association fees.
The benefits of mortgage protection insurance
One benefit of MPI is that it’s typically issued on a “guaranteed acceptance” basis. “If you fill out the application, few questions will be asked to keep you from getting coverage,” says Lynch. “That’s valuable for people who are uninsurable or insurable at a high rate because of health issues.” It’s also valuable for people who work in high-risk occupations, such as roofers, who usually can’t get disability insurance.
The drawbacks of mortgage protection insurance
Obviously, mortgage protection insurance is a waste of money if you own your home outright. In addition, MPI is a declining-benefit policy, which means that even though you pay a set premium for the life of your mortgage, the payoff amount decreases as you pay down your mortgage.
Wiping out your mortgage may also not be the best financial move for your family if you die. “When my father passed away very young, my mother’s home was paid off by a lump-sum payment to the mortgage company,” says Lynch. “Her mortgage payment was something like $112 a month. It would have been more beneficial for her to receive the lump sum and earn the 18 percent interest banks were paying in the 1980s while continuing to make the mortgage payment.”
Some financial planners also say purchasing MPI is like buying tires when you need a car. “Focusing on insuring for the mortgage is relatively myopic,” says Vernon Holleman III, president of The Holleman Cos., a financial planning company in Chevy Chase, Md. “You ought to think about financial planning more globally. Whether to pay off the mortgage upon a breadwinner’s death is a question you can’t answer unless you’re taking a comprehensive look at the family’s finances.”
Choosing and saving on MPI
If you have health or job risks that make life or disability insurance unavailable or too expensive, mortgage protection insurance is probably a smart option. But don’t sign up through your mortgage company without shopping around.
“Ask about the price and features of each policy and whether it can be converted into whole life insurance,” says Ketcham. “Also investigate the insurer’s financial condition through A.M. Best Co., which rates insurers.”
If you’re considering MPI payable on your death, Holleman suggests purchasing a level life insurance policy instead, which doesn’t decrease in value, that will cover not only your mortgage but also your family’s living and educational expenses without your income.
“You’re far better off using a level product because most insurance carriers allow a later reduction in the policy’s face value,” says Holleman. “If at, say, year seven in your policy, you decide your need isn’t $1 million but only $800,000, you can reduce the face amount and save through the reduced premium. You’re better off controlling the benefit than having it automatically reduced.”