What is mortgage protection insurance? Mortgage protection insurance (MPI) is a type of life insurance designed to pay off your mortgage if you were to pass away… and some policies also cover mortgage payments (usually for a limited period of time) if you become disabled.
Note: Don’t confuse MPI with private mortgage insurance (PMI), which protects the lender if you default on the loan. With PMI, your family would still owe the balance of the loan if you passed away
What is mortgage protection insurance? (Explained)
Mortgage protection insurance policies function as 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 in general only cover the principal and interest portion of a mortgage payment, so 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.
Some policies are designed to help those living in your home, or your loved ones, with making the mortgage payments in the event of your passing. 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 your 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 a job loss, 50 percent or 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.
- The policy guarantees a sum assured which should be sufficient to repay the outstanding loan at any time during the duration of the policy
- Protects one’s estate and property
- Saves the family from embarrassment of the deceased’s property being impounded by the lender
- Single or annual premium consistent with value of property/estate
What’s good about MPI?
- Guaranteed approval. Even if you’re in poor health or work in a dangerous profession, there is guaranteed approval with no medical exams or lab tests.
- No guesswork. The check goes straight to the lender for the exact mortgage balance, so there’ll always be enough and your family won’t have to handle the money.
- Disability protection. Some MPI policies make mortgage payments (usually for a limited time) if you become disabled or lose your job.
What’s not so good about MPI?
- Lack of flexibility. MPI gives beneficiaries no choice. The insurance pays off the mortgage — nothing else. This means your family can’t use the money for anything else.
- Higher cost. MPI typically costs more than term life insurance, especially for healthy, responsible adults. And some policies don’t guarantee the price will remain the same over the term of coverage.
- Shrinking coverage. As your mortgage balance declines, the policy’s payout declines with it. That means you’ll end up paying the same cost for less coverage over time.
- More restrictive age limits. MPI policies often have more restrictive issue ages than term life. For example, some insurers won’t issue a 30-year MPI policy to anyone over age 45.
How much will mortgage protection insurance pay out?
Insurers will pay you a set amount each month, typically for a period of up to two years. Depending on the provider, you may be able to choose how your policy will pay out. For example, you might want the policy just to cover the cost of your mortgage payments, or you may want it to cover the cost of other bills too. If you opt for the latter, providers will typically pay out 125% of your mortgage costs. You can also choose to base the cover on your salary. Providers will typically pay out up to 50% of your monthly salary. If you were off sick for longer than two years, MPPI may not cover all of your needs, and an income protection insurance policy may be more suitable.
Do you need mortgage protection insurance?
MPI is not required, and not always a financially prudent 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, explains Henry Yoshida, CFP, CEO and co-founder of Rocket Dollar, an Austin, Texas-based self-directed IRA and solo 401(k) provider.
To apply the DIME method (as outlined by insurance giant World Financial Group):
- Add up all of your outstanding debt, including your mortgage balance; your income; and the anticipated education expenses of your children.
- Subtract from that sum any existing insurance coverage you have in place. If there’s a surplus, you have enough coverage. If there’s a shortfall, that’s the amount of life insurance you should purchase.
Where can I get mortgage protection insurance?
If mortgage protection insurance feels like a good fit for you, it’s important to take the same approach you took with finding your actual mortgage. Comparison is key.
MPI is not as widely available as other types of insurance, so you might need to do some digging to determine which companies offer it. Evaluate the pricing and features of different MPI policies from a few insurance companies, and make sure you understand what the policy does and doesn’t cover before committing to it. While you’re at it, be sure to compare life insurance costs with that MPI policy — you might find one option is more suitable for your situation than the other.
What are the alternatives to mortgage protection insurance?
Before you take out a mortgage payment protection policy, it’s worth thinking about whether other forms of insurance may be better suited to your needs.
1: Income protection: Income protection a proportion of your salary if you can’t work because of an accident or sickness. Some income protection policies pay out for a longer period than mortgage insurance, for example until you can go back to work or reach retirement. Income protection is a more effective way of insuring against ill health than mortgage payment protection insurance, as you’re medically assessed when taking out the policy and will know in advance what you will and won’t be covered for. However, it also tends to be more expensive than mortgage payment protection insurance. Find out more in our guide to income protection explained.
2: Critical illness cover: Critical illness insurance pays a lump sum if you’re diagnosed with a serious illness, but it will not provide a regular income. Find out more in our guide to Critical illness insurance explained.
3: Life insurance: Life insurance is not really an alternative to mortgage payment protection, for the simple fact that it only pays out when you die. But is worth considering if you have dependents as it will pay out a lump sum in the event of your death. You can opt for the lump sum to be enough to cover the cost of your total outstanding mortgage debt.
4: Employee benefits: Before you take out any new protection insurance, check whether there are any arrangements already in place with your employer. Some companies will continue to pay your salary, or a proportion of it, for a set period if you need to take time off owing to illness. You may also be covered by income protection insurance from your employer.
5: Government help: If you become unemployed, you may be able to get state benefits such as jobseeker’s allowance or employment and support allowance. If you’re eligible for these benefits, you may also be able to apply for a Support for Mortgage Interest (SMI) loan. Under the scheme, your lender will receive payments from the government covering all or part of the interest on the first £200,000 of your mortgage at the Bank of England’s published monthly average mortgage interest rate. The loan won’t cover your capital repayments, though – and you’ll need to pay off your SMI loan with interest if you sell or transfer ownership of your home. If the sale of your home does not cover the entire cost of your SMI loan, any remaining loan will be written off. Visit gov.uk for more information.
If you own your home free and clear, MPI could be a waste of money. And most people don’t need MPI if they have sufficient life insurance (even if those solicitations say otherwise). If you don’t have enough life insurance, consider getting more. Term life will likely be a more flexible and more affordable option for those who qualify.
However, for those who have trouble getting traditional life insurance, MPI can provide important protection that might not otherwise be available to you — and the extra cost may be worth it.
Before you decide, get price quotes and contact your local independent insurance agent to see if you’d qualify for term life insurance.