Life insurance can be used to provide financial protection for everyday expenses, retirement costs, education, and more. But one of the most common reasons for having life insurance is so that loved ones can continue paying the mortgage and stay in their home, even after you're gone. Your home is often your biggest and longest-lasting debt, so it's important to have a policy with enough coverage for your family to cover the cost of staying in your home.
A standard term life insurance policy is usually enough for this, but there's another type of life insurance called mortgage protection insurance, or MPI, that's tied to your mortgage. For most people, the restrictions of an MPI policy don't make it a better option than your average term life policy.
What is mortgage protection insurance?
Mortgage protection insurance is basically what it sounds like: life insurance that’s designed to protect your family from burdensome mortgage payments if the primary breadwinner is no longer around to provide an income.
Mortgage protection insurance is broadly similar to term life insurance in how it works. You buy a policy, pay regular premiums, and at the end of the policy term, your coverage ends. If you die during the term of the policy, a death benefit is paid out to your beneficiaries.
However, mortgage protection insurance has a few key differences from term life insurance: your family members aren’t your beneficiaries and the death benefit amount decreases over time.
Mortgage protection insurance death benefit
First, the mortgage company or lender is the beneficiary in a mortgage protection insurance policy. That means the death benefit bypasses your family and goes straight to the mortgage lender to pay off the mortgage.
And speaking of the death benefit, because it’s used to pay off your mortgage balance in most cases, it usually decreases after the first five years of coverage to match your remaining mortgage payments.
Mortgage protection insurance term length
The term lengths for term life insurance policies are fairly flexible; you can usually choose term lengths in five- or ten-year intervals, and some insurance companies even allow custom term lengths. However, mortgage protection insurance is usually locked in at the same length of time as your mortgage itself: 15 years or 30 years. Your term length may also be limited by your age.
Is mortgage protection insurance worth it?
If you’re worried about leaving loved ones with a mortgage payment if you die but can’t get a competitive life insurance rate due to age or health issues, a mortgage protection insurance policy may help. Look into different mortgage protection insurance companies before signing up with your mortgage lender to make sure you're getting the best deal. But first, you should see if you’re eligible for a traditional term life insurance policy.
For most people, a term life insurance policy is the better option. It’s more affordable, provides more protection, and allows for more flexibility than most mortgage protection insurance companies do. And even if you think an affordable policy is out of reach because of your health, it’s worth getting a free quote — you’ll probably be surprised at how competitive your term life insurance rates can be.
Additionally, because your house is such a major investment, you’ll probably want to keep protecting it while you’re alive. A homeowners insurance policy protects the structure of your home and any attached property as well as the contents inside of the home, even if you’re still making mortgage payments. That way, if you lose your home or if it’s seriously damaged because of a covered peril, you won’t necessarily lose your investment.
What’s good about mortgage protection insurance?
Mortgage protection insurance highlights one of the biggest debts a person can have and earmarks money specifically for it. If your family receives a lump sum of money from a traditional term policy, it can be overwhelming knowing how to allocate it appropriately.
Mortgage protection insurance takes the guesswork out of how to spend the money. Because it’s matched up to the mortgage balance, and the money will go only toward that, there’s no worrying that there won’t be enough to cover the remaining mortgage. If you die, your mortgage protection insurance payments go towards your monthly mortgage payments so your family doesn’t lose their home.
Mortgage protection insurance policy alternatives
The most popular – and best – alternative to mortgage protection insurance is a standard term life insurance policy. It’s like a mortgage protection insurance policy in that you pay for the policy for a certain amount of time, but it offers more flexibility than a mortgage protection life insurance does.
Term life insurance provides your beneficiaries (who can be your family, other loved ones, or even institutions) a tax-free, lump-sum of cash that they can use to pay off a mortgage, pay off other loans, save for retirement and college, or just cover day-to-day bills.
Return of premium rider
When the policy term has ended, you will be refunded the sum of your premium payments, minus any applicable fees.
Disability waiver of premium rider
If you become disabled, premium payments will be temporarily waived until you have recovered.
However, applicants can also get additional coverage riders. Because mortgage protection insurance limits the term length of policies to better match with mortgage terms, you won’t have the flexibility of a traditional term life insurance policy. You can choose to add 15 or 30-year riders to increase the term of your policy if needed.
Mortgage protection insurance protects your family’s housing if you die prematurely and haven't paid off your mortgage. But because it doesn’t cover other vital costs, such as bills and everyday expenses, it’s best to buy a traditional term life insurance policy instead. If you are ineligible for term coverage, a mortgage protection insurance plan is a good backup.
