Mortgage Protection Insurance (MPI): When Do You Need It?
For many people, being a homeowner is the greatest achievement in life. But if you become disabled or suddenly pass away, your family could fall behind on mortgage payments, eventually leading to foreclosure.
However, some safeguards can help if you can no longer pay your mortgage. One option is mortgage protection insurance, which pays off the mortgage under certain circumstances. Though MPI sounds good, it’s important to weigh the pros and cons before taking out a policy.
What Is Mortgage Protection Insurance?
Mortgage protection insurance is a type of insurance policy designed to pay off your mortgage if the homeowner passes away. If you, the homeowner, pass away with a balance on your mortgage and have an MPI policy, the insurer will pay the remaining balance to your lender.
Some policies cover or reduce mortgage payments for a limited time if you become disabled and unable to work or lose your job. The terms of these policies vary by provider.
MPI essentially works like a life insurance policy. Once you sign up, you pay monthly premiums to keep your policy in force. The monthly premium cost varies depending on various factors, including your age, gender, location, health and mortgage term.
The Difference Between MPI, PMI and MIP
The terms mortgage protection insurance, private mortgage insurance and mortgage insurance premium are often confused and sometimes used interchangeably. Though the terms are almost identical, they are distinctly different.
As aforementioned, MPI protects you if you can no longer pay your mortgage due to disability or in the event of your passing. PMI is different from MPI; it protects the lender if you default on a mortgage loan. Lenders require PMI when you take out a mortgage loan and put down less than 20%.
On the other hand, MIP applies to Federal Housing Administration loans, and it functions the same as MPI in that it protects the lender if you default on loan payments.
Pros and Cons of Mortgage Protection Insurance
As with any other insurance policy, MPI comes with its advantages and disadvantages.
- Guaranteed acceptance: It’s pretty easy to qualify for MPI because it doesn’t require a medical exam. This can be advantageous for individuals with health problems.
- Protects during unprecedented times: If you face a severe disability, lose your job or die, an MPI policy will pay off your mortgage balance.
- Coverage shrinks over time: MPI decreases in value as your mortgage balance declines.
- Expensive: In many cases, the cost of MPI exceeds term life insurance, which requires applicants to meet underwriting requirements.
- More restrictive age limits: Some MPI policies restrict eligibility based on age.
- Potentially better alternatives: With an MPI policy, all proceeds go to the lender, meaning your loved ones won’t get any financial protection if you die. Therefore, a life insurance policy might make more sense.
Is Mortgage Protection Insurance Right for You?
The question of whether MPI is right for you is largely dependent on your specific needs.
MPI is not for everyone because it decreases in value over time, making it difficult to get it later in life. This type of insurance may be ideal for homebuyers who are young adults who have trouble getting approved for term life insurance, work in high-risk jobs or have existing health conditions.
If you think MPI isn’t suitable for you, consider term life insurance. This type of policy provides coverage for a specific period, usually between 10 years and 30 years. If you die within your policy term, your beneficiaries will receive a death benefit, which they can use as needed.
Where To Get Mortgage Protection Insurance
If mortgage protection insurance feels like a good fit for you, it’s prudent to compare prices from multiple providers to ensure that you get the best deal. Also, before committing to a policy, make sure you understand what the policy covers and what it doesn’t. You can get an MPI policy in different ways, including:
How To Get MPI:
- Through your mortgage lender. Your mortgage lender might offer you an MPI policy once you close on your loan. If your lender doesn’t provide MPI policies, you can ask for a referral for companies that do.
- Through an insurance company. Some insurance companies specialize in mortgage protection insurance, but they are not available in every state.
- Through a life insurance provider. Most companies that offer life insurance also provide MPI. Plus, you can get huge discounts if you bundle MPI with life insurance.
As a homeowner, taking precautions for the unknowns of the future is crucial. For some people, getting mortgage protection insurance makes complete sense and could help their heirs. But for some, it could be a waste of money. Therefore, be sure to talk to a lender or real estate professional before taking out an MPI policy.
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- Forbes. 2021. "How Does Life Insurance Work?"
- Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?"
- Forbes. 2019. "What is PMI On A Mortgage And What You Can Do To Avoid It"
- Forbes. 2020. "The Keys To Mortgage Life Insurance."