insurance

Do you need mortgage protection 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."

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