After you purchase a home with a mortgage, you may start noticing solicitations in the mail for Mortgage Protection Life Insurance (MPI). Often times, the mail contains alarmist headlines such as:
- IMPORTANT NOTICE! PLEASE COMPLETE AND RETURN!
- FINAL NOTICE! MORTGAGE PROTECTION CARD!
- NOTICE OF OFFERING! MORTGAGE FREE HOME PROTECTION!
This type of scare tactic should make you wary about getting mortgage protection life insurance. Because if the issuer is trying to scare and sell you so hard, perhaps the benefit isn't quite there.
What Mortgage Protection Life Insurance Covers
Mortgage protection life insurance is designed to pay your outstanding mortgage balance in the case you pass away. This coverage is often offered by your mortgage lender, as a way for the lender to make even more money off you.
When you take out a mortgage, you are already paying mortgage origination fees, title fees, and potentially points. Here are all the fees when buying a home with a mortgage. Even with a no-cost mortgage refinance, there are still fees to pay.
You can't fault a lender/bank for charging fees. Otherwise, how would they stay in business and offer you a great mortgage? Offering a mortgage protection life insurance policy is just another way to meet demand and earn a profit.
MPI can also be purchased through unaffiliated insurers. Since so many parties offer mortgage life insurance, the structure and benefits can vary significantly.
An easy way to compare mortgage life insurance is to check online with PolicyGenius, the #1 insurance marketplace today. It's much more efficient than applying to each life insurance carrier one-by-one.
Mortgage Protection Life Insurance Attributes
If you get a mortgage life insurance policy, the coverage duration is generally for 15 years or 30 years. The death benefit can be structured in three ways:
- Decreasing: The death benefit may be fixed for the first few years of coverage, but then decreases at a specified rate over the life of the policy. This is meant to mimic the rate at which an amortizing mortgage is paid off. This is a good option, however, it may not entirely pay off your mortgage balance if you were to pass.
- Mortgage Principal: Some policies tie the death benefit to the outstanding mortgage principal. This will behave similarly to a decreasing death benefit but, if you pay off your mortgage faster or slower than expected, the policy will reflect that. This is a nice option since it pays off your exact mortgage liability, which is the goal.
- Level: The death benefit will remain the same over the life of the policy. This policy will be more expensive since the death benefit doesn't decline over time. However, this policy is appropriate for those who have an interest-only mortgage or those who have an extremely low interest rate and don't plan to pay extra principal over time to pay down the mortgage quicker.
In 2022, mortgage rates have risen aggressively due to high inflation and an aggressive Fed. Homeowners and prospective homeowners should shop around online for free for the lowest rates and refinance.
Caveats For Mortgage Protection Life Insurance
Unlike term life insurance or permanent life insurance, the death benefit gets paid out to your mortgage lender, not beneficiaries of your choice. If the death benefit so happens to be higher than the remaining mortgage balance, the overage is kept by your lender, not you.
Given this situation, choosing the Mortgage Principal death benefit or a Decreasing death benefit option is the better choice if you were to get mortgage protection life insurance.
Another caveat to be aware of is that some mortgage protection policies will only pay a death benefit if you die from an accident. Therefore, if you pass away from natural causes, like a heart attack, your mortgage protection life insurance policy may not pay out. Make sure you ask your life insurance issuer in what situations does an MPI not pay out.
The final caveat of a mortgage protection life insurance policy is that it may be tied to your home or your mortgage. If you refinance your mortgage with another lender, you may lose your existing MPI. If you decide to sell your home and buy a new home later on, you would need to apply for a new MPI.
Given life insurance quotes are highly correlated with your age and health, you will likely have to pay higher MPI premiums in the future.
Get Term Life Insurance Instead
To recap, here are the negatives of mortgage life insurance and why you should get term life insurance instead.
- Lack of flexibility: Unlike regular term life insurance, where beneficiaries may use insurance payouts as they see fit, most mortgage protection insurers send benefit payments directly to lenders, so your beneficiaries never see any money.
- High premiums: MPI is more costly than term life insurance.
- Lack of transparency: It's hard to gain clarity about a proposed MPI versus a term life insurance policy.
- Fluctuating premiums: Premiums on MPI policies might only be fixed for the first five years, after which time they could spike at any time. A term life insurance policy is fixed.
Here's a great chart from PolicyGenius that highlights the differences between term life and mortgage life.
| Feature | Term Life Insurance | Mortgage Life Insurance |
|---|---|---|
| Amount of Coverage | Any amount | Mortgage principal |
| Length of Coverage | 5-35 years | Mortgage length |
| Beneficiary | Your choice (child, spouse, etc) | Mortgage lender in most cases |
| Death Benefit Paid Upon… | Your death | Your accidental death |
| Underwriting | Health questions and medical exam | Health questions (often no medical exam) |
If you're in good health, term life insurance is better because you'll get cheaper quotes and the death benefit goes to the beneficiary you choose. The flexibility of beneficiary and the flexibility of where the death benefit should be spent by the beneficiary is the better option.
Mortgage life insurance quotes are more expensive for healthy homeowners because most policies don't require you to get a medical exam prior to purchase, similar to the simplified issue life insurance or guaranteed issue life insurance policy. Given no medical exam is required, mortgage life insurance companies will charge higher premiums to be more cautious.
If, however, you have pre-existing medical conditions that prevent you from getting traditional term insurance, then getting mortgage life insurance is a reasonable alternative.
Higher risk people with conditions such as heart disease or diabetes, can often cause shoppers to be turned down for fully underwritten term life insurance. That, or the premium is just so high that term or permanent life insurance is unaffordable.
More Mortgage-Related Insurance Policies
In addition to mortgage life insurance, there are a few additional policies you may hear about when obtaining a mortgage. :
- Mortgage Disability Insurance – If you become totally disabled, this policy covers your mortgage payments. Coverage can be for the entirety of the payment or just a percentage.
- Mortgage Unemployment Insurance – Similarly, if you become unemployed for a period of time, this policy helps to cover your payments.
- Private Mortgage Insurance (PMI) – If you get a mortgage for over 80% of your home’s value, your mortgage lender may consider you to be high-risk and require that you pay for private mortgage insurance. This policy protects your lender in case you fail to make payments and is completely different from MPI.
All of these types of mortgage-related insurance policies are fine if you have a need. However, I still think planning properly and getting a term life insurance policy is the best way to go.
Here are all the life insurance options available today. It's a good idea for all of you to learn about the various types given no one situation is the same. For example, you might be a business owner who wants to protect the business against your loss. There's key person life insurance for that just like how there is mortgage protection life insurance.
When Should You Get Mortgage Protection Life Insurance?
If you buy a home with a mortgage and you can't get an affordable term life insurance policy due to health issues, then consider getting a mortgage protection life insurance policy. There are many other life insurance options to choose from as well.
Most people buy life insurance after they get a mortgage and have children. I got a $1 million term life insurance policy when I took out a $1.2 million mortgage because I didn't want my girlfriend at the time to be saddled with so much debt if I were to pass. I already knew she would be my wife.
If I did not qualify for a term life insurance policy, I would have gotten a mortgage protection life insurance policy for at least five years. During this five-year time frame I would have saved as aggressively as possible, tried to boost my wealth as much as possible, and build as much passive income as possible in order to leave enough money to pay off or pay for the mortgage if I were to pass.
Even if your only choice is mortgage protection life insurance, at least you made sure that your main goal of paying off your mortgage is achieved if something were to happen to you.
Recommendations
The most efficient way to get competitive term life insurance quotes is to check online with PolicyGenius, the #1 life insurance marketplace where qualified lenders compete for your business. It's much easier to apply on PolicyGenius than go to each carrier one-by-one to get a quote. I've know the founders for years and they have truly build a fantastic resource for individuals and small business owners.
