Buying a home is a major financial commitment. Depending on the loan you choose, you might commit yourself to 30 years of payments. But what will happen to your home if you suddenly die or become too disabled to work? Mortgage protection insurance can help your family cover your mortgage under certain circumstances – you can avoid foreclosure if you can no longer work to pay your mortgage. Let’s take a closer look at what MPI is, what it covers and who might need a policy.
MPI helps your family make your monthly mortgage payments when you die. Some MPI policies will also offer coverage for a limited time if you lose your job or become disabled after an accident. Some companies call it mortgage life insurance because most policies only pay out when the policyholder dies.
Most MPI policies work the same way as traditional life insurance policies. Every month, you pay your lender a premium. This premium keeps your coverage current and ensures your protection. If you die during the term of the policy, your policy provider pays out a death benefit that covers a set number of mortgage payments. The limitations of your policy and the number of monthly payments your policy will cover come with the policy’s terms. Many policies agree to cover the remaining term of the mortgage, but this can vary by lender. Like any other type of insurance, you can shop around for policies and compare lenders before you buy a plan.
MPI differs from traditional life insurance in a few important ways. First, the beneficiary of an MPI policy typically isn’t your family – it’s your mortgage company. If you die, your family doesn’t see a lump sum of cash like they would with a typical term life insurance policy. Instead, the money goes directly to your lender. When you receive a lump-sum payment from a term life insurance policy, your family is the beneficiary and can spend the money however they please.
Some homeowners think this is a good thing. It can be hard to budget for a massive payout, and MPI guarantees that the money will go toward keeping your family in your home. However, this also means that your family can’t depend on your insurance to cover other bills. You cannot use an MPI policy to fund things like funeral expenses and property taxes.
Secondly, MPI policies are typically non-medical and issued within a few days. When you buy a term life insurance policy, the cost you pay each month depends on factors like your health and occupation. You get a simplified issue/No-Exam underwriting process with an MPI policy. This can be very beneficial if you need coverage right away and have some minor health issues. However, it also means that the average MPI premium is slightly higher than a fully underwritten life insurance policy for the same death benefit. For healthy adults who work in low-risk jobs, this can mean paying more money for less coverage.
The last difference between MPI and traditional life insurance are the regulations involved. MPI policies have a number of strings attached that can change your benefits. For example, most MPI policies include a clause that states that the balance of your death benefit follows the balance of your mortgage. The longer you make payments on your loan, the lower your outstanding balance. The longer you hold your policy, the less valuable your policy is. This is different from life insurance policies, which typically hold the same balance for the entire term.
Many MPI companies also have strict limits on when you can buy a policy. Most companies require you to buy your insurance policy within 24 months after closing. However, some companies might allow you to buy a policy up to 5 years after you close on your loan. Your MPI company may also deny you coverage based on your age because older home buyers are more likely to receive a payout than younger ones.