What is mortgage protection insurance?
Mortgage protection insurance policies work like a type of life or disability insurance. The cost of the monthly premium varies depending on the amount of the mortgage, your age, and your health. MPI policies generally only cover the principal and interest portion of a mortgage payment, so other fees such as HOA fees, property taxes, and homeowners insurance would remain your responsibility. However, you may be able to add a rider to cover these expenses.
Some policies are designed to help those who live in your home, or their loved ones, make mortgage payments in the event of your death. For example, if you die with a balance on your mortgage and have an MPI policy, your insurer pays the remainder of the balance directly to your lender. Your partner or heirs won't have to worry about making the remaining payments or losing the home.
Some MPI policies are designed to help cover or reduce your monthly mortgage payments if you lose your job or face a serious disability that prevents you from working. The terms of these policies vary. For example, Bank of Montreal's mortgage protection insurance for a disability can cover 50 percent or 100 percent of your mortgage payment for up to two years, and for job loss 50 percent or 100 percent of your mortgage payment. 100 percent of the payment for up to six months. Some policies have waiting periods, such as 30 or 60 days, before these payments are made.
Do you need mortgage protection insurance?
MPI is not required, and it is not always financially prudent.
You can get similar coverage through a sufficient life insurance policy using the DIME (debt, income, mortgage, education) method, which takes your mortgage into account when deciding how much life insurance to buy, explains Henry Yoshida, CFP, CEO, and co-founder of Rocket Dollar, a self-directed IRA based in Austin, Texas and individual 401 (k) provider.
To apply the DIME method (as described by the insurance giant World Financial Group):
- Add up all your outstanding debts, including your mortgage balance; Your income; and your children's anticipated education expenses.
- Subtract any existing insurance coverage you have from that amount. If there is a surplus, you have enough coverage. If there is a shortfall, that is the amount of life insurance you must buy.
Differences between MPI, PMI, and MIP
Mortgage Protection Insurance can easily be confused with another abbreviation, PMI, or private mortgage insurance. While the letters and terms on these insurance products are nearly identical, they are different. As described above, MPI protects you; PMI protects the lender who loaned you your mortgage and is required in conventional loans when the borrower puts down less than 20 percent.
To make all of this even more confusing, there is another acronym, MIP, which stands for the mortgage insurance premium and applies to FHA loans. Like PMI, MIP protects the lender, not the borrower. However, unlike PMI, MIP cannot be eliminated on an FHA loan unless the borrower has made a down payment of at least 10 percent.
Advantages of MPI
Your home is your most essential asset, so Mortgage Protection near me insurance can provide another layer of security. The pros include:
- Guaranteed Acceptance: Most MPI policies are issued on a "guaranteed acceptance" basis. That can be advantageous for people who have health problems and have to pay high fees for life insurance or are having difficulty obtaining a policy.
- Peace of mind: right now we are in an uncertain economy. An MPI policy that will make payments after you lose your job can make a big difference if you find yourself out of work.
Cons of MPI
Mortgage protection insurance is optional, and there are many reasons to consider opting out or opting for the flexibility of a traditional life insurance policy.
- More Out-of-Pocket Cash: The MPI premium adds more burden to your monthly budget.
- Limited benefits in some cases: If your mortgage is nearly paid off or you paid for the home with proceeds from the sale of another home, paying for an MPI policy is generally not a good use of your money. Rather, that money could be kept in an emergency fund or retirement portfolio. Also, if you plan to make additional payments to pay off your mortgage early, you may not benefit as much from MPI because the loan repayment amount decreases as the mortgage is paid off. (However, some of the newer MPI policies include what is known as a tier death benefit, which means that the payments will not decrease.)
Potentially better alternatives: Because the MPI is paid directly to your lender, it will not provide any financial protection to your loved ones if you die, other than your mortgage payment. A life insurance policy might make more sense because the policy is paid to its beneficiaries, who can then decide how to allocate the money, either for the mortgage or elsewhere. For healthy nonsmokers, life insurance premiums are also generally lower than MPI.
Where to get mortgage protection insurance
If mortgage protection insurance sounds like a good option, you must take the same approach that you took to finding your real mortgage. Comparison is key.
MPI is not as widely available as other types of insurance, so you may need to do a little research to determine which companies offer it. Evaluate the prices and features of different MPI policies from some insurance companies and make sure you understand what the policy does and does not cover before you commit to it. As you do so, be sure to compare your life insurance costs with that MPI policy; you may find one option more suitable for your situation than the other.