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Rae Hartley Beck is a writer and editor with over eight years of experience in personal finance. Her work has most recently appeared in Bankrate, MoneyWise and Investopedia. Rae specializes in credit card rewards, investing, real estate, home improvement, lending and financial advice for millennials, Gen Z, Gen Alpha and their parents.
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Kenneth Chavis IV is a senior wealth counselor at Versant Capital Management who provides investment management, complex wealth strategy, financial planning and tax advice to business owners, executives, medical doctors, and more.
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As a homeowner, you pay for homeowners insurance to cover a variety of worst-case scenarios that can impact your property. Mortgage protection insurance (MPI) is a different type of safeguard that could be helpful if you’re unable to repay your mortgage. While that extra protection sounds good, MPI isn’t for everyone. Here’s when mortgage protection insurance is worth it.
Mortgage protection insurance is an insurance policy that pays off the remainder of your mortgage if you pass away or if you become disabled and can’t work. In that way, it functions similarly to life insurance and disability insurance. Unlike those types of insurance, however, the payment does not go to you or your heirs but goes directly to your mortgage lender to pay off the loan.
Generally, MPI policies — which can often be purchased from banks and mortgage lenders — only cover the principal and interest portion of a mortgage payment. That means other fees like HOA dues, property taxes and homeowners insurance would still be your responsibility. You might be able to add a policy rider, however, to cover these expenses.
As you pay off your mortgage, the insurance payout decreases, but your premiums stay the same. For many, this is a major drawback of MPI. Still, these types of policies can be easier to get than life insurance because there’s no requirement for a medical evaluation.
Mortgage protection insurance can easily be confused with another abbreviation: PMI, or private mortgage insurance.
If you’re getting a conventional mortgage with less than 20 percent down, you’re required to pay PMI until you accumulate 20 percent equity in your home, either by paying down your loan per the repayment schedule, prepaying your loan or having your home reappraised.
PMI doesn’t protect you, however — it protects the mortgage lender if you were to stop paying back your loan.
There’s yet another acronym: MIP, which stands for mortgage insurance premium and applies to FHA loans. Like PMI, MIP protects the lender, not you. However, unlike PMI, you’ll pay MIP for the duration of the loan term, in most cases.
Both PMI and MIP are required insurance coverages. An MPI policy is entirely optional.
The amount you’ll pay for mortgage protection insurance depends on a variety of factors, including the insurer and the current balance of your mortgage.
Mortgage protection insurance might be worth it for people who can’t get approved for traditional forms of life or disability insurance, or for whom premiums for a traditional policy are cost-prohibitive. Still, there are pros and cons:
While MPI and life insurance both pay out benefits upon your death, life insurance is more flexible. The beneficiary of a life insurance policy is usually a family member who can use the funds however they see fit. In the case of MPI, the beneficiary is your lender, who will only use the payout to repay the mortgage.Life insurance companies also offer a wider range of coverage and premium policies. MPI limits coverage based on your property and personal health.
Learn more: Mortgage protection insurance vs. life insuranceIf you think MPI is an option for you, there are three general places to get it:
MPI is not required, and not always a financially smart move. You can get similar coverage through a sufficient life insurance policy by using the DIME (debt, income, mortgage, education) method, which takes into account your mortgage when you decide how much life insurance to purchase.
However, MPI can be a good choice if your employment is unstable and you might need assistance paying your mortgage in the future. It can also be helpful for individuals who do not qualify for or can’t afford a traditional life insurance policy.
You can choose whether you need mortgage protection insurance and for how long you need it. The terms generally range from 10 to 30 years. You might want your mortgage protection insurance term to be close in length to how long you have left to pay off your mortgage
You can cancel a mortgage protection insurance policy. You’ll need to contact your insurance provider, inform them of your plans to cancel and follow their instructions. Keep in mind, the process can vary by insurer, and they won’t reimburse you for premiums already paid.
Rae Hartley Beck is a writer and editor with over eight years of experience in personal finance. Her work has most recently appeared in Bankrate, MoneyWise and Investopedia. Rae specializes in credit card rewards, investing, real estate, home improvement, lending and financial advice for millennials, Gen Z, Gen Alpha and their parents.
