Mortgage life insurance, also known as mortgage protection insurance (MPI), mortgage payment protection insurance (MPPI) or even mortgage disability insurance, pays off your mortgage if you die or are disabled.
Like all other types of life insurance, mortgage protection insurance policies exist to protect family members from struggling financially after the death of a loved one.
No one wants to imagine their loved ones having to leave the family home after they die.
However, it is this emotional response that sellers of mortgage life insurance play upon when they make their sales pitch. While the idea of paying off your mortgage in full and helping your family avoid burdensome debt can sound great, can a term life insurance policy offer a better value or do you specifically need mortgage life insurance?
If so, how does it work, who are the best mortgage life insurance companies, and what are their rates?
What Is Mortgage Life Insurance?
Mortgage life insurance is a specific kind of life insurance that repays your mortgage in the event of your death, disability, or job loss.
Everyone who takes on a mortgage is offered this kind of coverage right when they sign their mortgage papers. In fact, if you turn down mortgage insurance as you sign your loan papers, you’ll be required to sign waivers and acknowledge that decision in writing.
This is a pretty strong sales tactic, but you shouldn’t be surprised: when you buy mortgage term life insurance, your beneficiary is technically your lender, not your family. Of course your family stays in your house if it gets paid off, but the entity who gets the insurance money is the lender. Is it any wonder then that your decision to decline is met with some opposition?
Mortgage life insurance is simply a form of decreasing term life insurance that can only be used for one thing: to pay off your mortgage balance. The death benefit matches the amount of your mortgage loan and the beneficiary is the lender. This policy is tied to your mortgage in every way, and therefore has a declining death benefit as your principle decreases with time. Unfortunately, while your death benefit is decreasing, your mortgage life insurance rates are fixed, so consumers are eventually overpaying for coverage.
As with most kinds, mortgage payment protection insurance comes with age limits: 30-year coverage is typically limited to consumers age 45 or younger, and 15-year coverage to those 60 years old or younger.
What Mortgage Life Insurance Is Not
Don’t confuse mortgage life insurance with private mortgage insurance (PMI). PMI is a requirement by law for any homeowner who puts less than 20% down on a property. Consumers don’t have a choice with private mortgage insurance because the bank will not give them a loan unless they increase their down payment to 20%.
It is true that in both cases the technical beneficiary is the lender, and the names sound the same, but do not confuse PMI with mortgage protection insurance because the financial results are nowhere near similar.
For one thing, if you die with only PMI in place, your heirs will still owe on the mortgage. If they don’t or can’t make payments, your house will be foreclosed on and your family will be out on the street, so don’t be confused thinking that PMI protects them somehow. It doesn’t.
Additionally, PMI can be required by law, whereas mortgage life insurance is never required of anyone. Instead, most people opt against this type of policy in favor of cheap term life insurance.
Mortgage Life: Pros and Cons
Like any other type of life insurance policy, mortgage policies have their pros and cons. Here are the key points to keep in mind when determining if mortgage protection insurance is right for you and your family.
Advantages of Mortgage Life Insurance
Coverage with minimal underwriting. Mortgage life insurance provides a benefit with what are usually very minimal health screenings. Similar to guaranteed life insurance, there is often no medical exam or blood sample taken and few medical questions are asked. This means that for people who might have trouble purchasing traditional term life insurance due to serious health problems or high-risk occupations, mortgage life insurance might be a valuable alternative.
Peace of mind. Like most life insurance products, one of the most important benefits of mortgage protection insurance is not worrying about what will happen to your family when you die. Especially if you have specific worries about housing for your family or have a very particular desire to keep your home in the family, this type of insurance may be a good choice for you.
Although these benefits are present, and for certain people may be valuable, there are serious drawbacks to mortgage life insurance coverage, companies, and rates.
Disadvantages of Mortgage Life Insurance
There are four primary reasons why mortgage life insurance is among the least attractive options for insurance coverage.
First, it is a decreasing benefit and will disappear when your mortgage is paid off. Next, you and your beneficiaries have no control over how the policy pays out. Another problem is that it benefits the lender, not the actual policyholder or family of the policyholder – at least not directly.
And finally, dollar for dollar, it is almost always more expensive than comparable term life coverage.
While your mortgage life insurance premiums stay constant, your policy’s benefits are tied to the principle. This means that the more you pay down your mortgage, the less the payout will be. Compared to normal term life policies with fixed premiums and fixed benefits, this is a bad deal in the long-run because you are eventually paying higher rates to get less coverage.
No Control or Flexibility
You may be the policyholder and the one paying the premiums, but when it comes to mortgage life insurance, you don’t have any control over how your death benefit will be paid out. No matter what the financial circumstances are at the time of your death, the entire benefit of the mortgage protection insurance is going to be paid directly to your lender to pay off that mortgage.
In fact, in terms of the mortgage insurance policy itself, your family members are not the beneficiaries of the policy at all. By choosing this policy in advance, you are taking the power to make financial choices away from your family.
This is one of the biggest benefits of buying a term life insurance policy with a large enough death benefit to cover your mortgage. If you die during the term period, term life allows your beneficiaries to determine how much of the house to pay off and how much to allocate to investments, living costs, final expenses, credit card debt, or medical bills.
In most cases, mortgage life insurance is more expensive than other types of policies for the amount of coverage you get. At the outset, your premium versus death benefit is balanced. However, since the benefit decreases over time but your rates stay the same, you end up getting less and less coverage for your dollar.
But what about people who would be denied life insurance for medical reasons or who want to avoid medical examinations? Should they elect to buy mortgage life insurance? Is it still more expensive than other kinds of specialized insurance like high risk or guaranteed life insurance?
If you are worried about health issues, you may still have trouble buying mortgage life insurance. Although there is usually no exam or blood test, mortgage life insurance companies will still ask basic health questions that may categorize you as “high risk”.
Alternatives To Mortgage Life Insurance
If you want a life insurance policy without a medical exam, then opt for a no exam, guaranteed issue, or burial life insurance policy instead. You’ll pay higher premiums but enjoy a level death benefit along with level premiums. Or, you can start with mortgage life insurance and then switch to guaranteed issue after you’ve paid down the mortgage.
Ultimately, the best option for most families is to buy a term life insurance policy. When comparing mortgage life insurance vs term life insurance, term life offers a fixed death benefit at cheap rates. And term payouts are made directly to your beneficiaries, allowing them to determine how best to manage their finances.
The Bottom Line
Almost all financial experts say that buying more general insurance coverage is far wiser than buying policies that pay for only specific expenses, like a mortgage. If you have financial dependents who rely on your income, maximize their benefits with affordable term life insurance. Only when you have no other options should mortgage life insurance be your fallback choice.