Mortgage Protection Insurance: What It Is and How It Works

Mortgage Protection Insurance (MPI), sometimes referred to as mortgage life insurance, is a specialized form of coverage designed to safeguard your family and pay off your remaining mortgage balance in the event of your untimely death or, in some cases, disability or job loss.

It represents a relatively cheap way to secure your asset, but it is not for everyone, which is why we’ll cover it today, providing all the pros and cons, as well as alternatives that may be better suited to your personal situation.

How Mortgage Protection Insurance Works

MPI functions in a similar way to disability or life insurance, but the main difference is that MPI policies pay the outstanding balance of your mortgage directly to the lender, while the former two insurance options pay the balance to your heirs.

Some mortgage lenders will include riders that temporarily cover your payments in cases of disability or job loss, but this depends on the lender and its policy terms.

Mortgage protection insurance policies are usually term policies, so if you purchase a 30-year mortgage, you might get a 30-year MPI policy that will cover its entire term, with the benefit decreasing over time as you pay off your loan, shrinking to match the outstanding mortgage balance.

This is the main differentiating point when compared to traditional life insurance policies, which will always maintain a fixed benefit.

Pros & Cons of Mortgage Protection Insurance

As we mentioned earlier, there are actual benefits to taking out an MPI policy, but there are also some downsides you should be aware of.

Pros:

• No medical exams: The main benefit of MPI policies is that they do not require medical underwriting and are usually guaranteed, which can make them better than other insurance policies in case you have health issues that would negatively impact a health insurance policy.
• Direct and guaranteed mortgage repayment: In case of your death, your family will at least not have to deal with checks and payments themselves, as the benefit is guaranteed and will be paid directly to the lender, providing them with some peace of mind.
• Optional add-ons: There are policies that will cover sudden job loss or disability, which can be hugely beneficial in keeping your mortgage payments going and giving you at least some time to get back on your feet.

Cons:

• Decreasing coverage: As we mentioned, MPI benefits will decrease as your mortgage loan is repaid, but the premium will stay the same.
• Higher cost: These policies are typically more expensive than traditional life insurance policies.
• Limited flexibility: Since MPI pays the lender directly, your beneficiaries have no control over how to use the funds, while traditional life insurance offers a fixed payout and gives your family the flexibility to use the money however they like.

Alternatives to Mortgage Protection Insurance

If you’re unsure about MPI, there are a number of alternative insurance options that you should consider, as they may provide more cost-effective and comprehensive coverage:

• Term life insurance can be a more flexible and often more affordable alternative to MPI. It gives you the ability to select coverage that exceeds your mortgage balance, as well as provide your beneficiaries with the ability to use the payout money as they see fit.
• Disability insurance will cover you in case you cannot continue to make payments due to illness or injury, as it replaces a portion of your income if you are unable to work. These policies are also not limited to mortgage payments, so they can help you cover your living expenses as well.
• Critical illness insurance will pay a lump sum of money if you’re diagnosed with a serious illness, such as a heart attack or cancer. With it, you can cover medical costs, mortgage payments, and other expenses.
• Savings and emergency funds can be a good alternative as well. For example, you can set aside the next twelve months of mortgage payments in a high-yield savings account, providing you with security and a financial cushion in case of any health issues or job loss.

Bottom Line

While mortgage protection insurance can be beneficial to some, especially those with preexisting medical conditions, it is still a more expensive option for many compared to traditional life insurance policies.

If you can make use of its advantages, however, it is still a valid option that will provide your family with some peace of mind in case of your untimely death.