Mortgage protection insurance (MPI) can help your family in covering your mortgage in certain circumstances, allowing you to avoid foreclosure if you are unable to work to pay your mortgage.

Let's look more closely at what MPI is, what it covers, and who might require a policy.

WHAT IS MORTGAGE PROTECTION INSURANCE?

Mortgage protection insurance, also known as mortgage life insurance, is an insurance policy that pays off your remaining mortgage balance if you die or become disabled unexpectedly. In some cases, it may even cover your mortgage if you are laid off.

It's important to understand, however, that the only beneficiary on a mortgage protection life insurance policy is your mortgage lender; your loved ones will not benefit directly from the coverage. This also means that if the policy only covers a portion of the mortgage balance rather than the entire balance, your family could lose the house and receive no compensation.

HOW DOES MORTGAGE INSURANCE WORK?

Mortgage protection insurance is typically purchased at the time of or shortly after the purchase of a home. The length of the policy will correspond to the number of years you have to pay off your mortgage. Mortgage protection insurance is typically sold by your mortgage lender, an insurance company affiliated with your lender, or another insurance company that mails you after discovering your information through public records. The premiums can be rolled into your loan if you purchase it from your mortgage lender.

The policy's beneficiary is the mortgage lender, not your spouse or another person of your choosing. This means that if you die, the insurer will pay the remaining balance on your mortgage to your lender. This type of life insurance does not provide funds to your family.

This is not the same as a standard term life insurance policy, which is another option if you want a life insurance policy to help pay off your mortgage if you die. You could get a regular term life policy with a face value at least equal to the amount of the mortgage you still owe. If you die during the term of the policy, your beneficiaries receive the death benefit, which they can use to pay off the mortgage.

Your beneficiaries can use a term life insurance death benefit for anything, so if you believe that paying off your mortgage is the most important priority, make that clear in your will.

HOW LONG MUST YOU HAVE MORTGAGE PROTECTION INSURANCE?

If you purchase mortgage protection insurance, you will continue to pay monthly premiums for the life of the policy. If you stop paying your premiums, your insurance company may cancel your benefits. You have the same right to cancel as you do with most other types of insurance. However, keep in mind that if you cancel, you will not receive any of the money you paid to your insurance provider.

IS MORTGAGE PROTECTION INSURANCE MANDATORY?

Mortgage protection insurance is optional. It is not the same as private mortgage insurance, which many banks and lenders require. The terminology and acronyms make it simple to confuse the two products. Mortgage protection insurance, or MPI, is a type of credit life insurance that is optional and pays the lender rather than your beneficiaries while PMI, or private mortgage insurance, is different. If your down payment is less than 20%, your lender may require you to purchase private mortgage insurance.

PROS OF MORTGAGE PROTECTION INSURANCE

One significant advantage is that you may not need to go through an underwriting process to get approved. For most term life policies, underwriting determines eligibility and rates, which means your age and health status, as well as a full medical exam, determine both whether you can get coverage and how much you'll pay. Some insurers provide mortgage protection insurance without underwriting, so you won't have to worry about being denied, and there is no medical exam.

Another significant and obvious benefit is that your family can remain in your home if you die without having to repay a loan. The coverage amount matches your mortgage, ensuring you have enough to repay everything you owe. The ability to avoid this financial burden is a significant benefit for surviving family members, especially if you were the primary breadwinner.

CONS OF MORTGAGE PROTECTION INSURANCE

Mortgage protection insurance is often inferior to term life insurance. It can be more expensive for the coverage you receive, and the death benefit value depreciates over time. By the way, the mortgage isn't the only expense associated with owning a home. In addition to monthly payments, there are property taxes and insurance, which can total thousands of dollars. If your family is unable to cover these expenses, they will be forced to sell the home, even if the mortgage is paid in full. A term life policy can provide a larger death benefit, allowing you to pay the mortgage while also covering these other expenses.

Furthermore, the policy's payoff is not guaranteed with mortgage protection insurance. If you pay off your mortgage before you die, you'll have nothing to show for all those years of premium payments.

BOTTOM LINE

Purchasing insurance is a responsible way to ensure your family's well-being. To determine what is best for you, you should investigate all of your options, including mortgage protection insurance, and consult with your loved ones. Before making any decisions, consider your loan amount and insurance quotes, and read all fine print.