For the majority of Americans, buying a home is the biggest investment of their life. While losing a loved one is hard enough, but losing the household provider can wreak havoc on your finances, but most importantly, the ability to stay in the home they love.
With that said, what is the best way to protect your home in the event tragedy were to strike. We are going to talk about the 2 most popular options when it comes to protecting your home and investment.
They are:
Mortgage Protection Insurance (MPI)
If you just closed on loan, refinanced, or opened up an equity line, your mailbox has probably been flooded with solicitations for mortgage protection insurance. These letters are usually dressed up to look as if they are coming from your lender with vague details on what they are offering.
MPI is a decreasing term life insurance policy designed to pay the remaining balance on your mortgage if you were to die un-expectantly. Some policies will pay your loan payment, for a set amount of time, if you become disabled or unemployed.
NOTE: Mortgage Protection insurance (MPI) is not PMI (Private Mortgage Insurance). PMI protects the lender if you were to default on the loan. PMI does not pay the balanced owed on the mortgage if you pass away, that would be your loved ones responsibility.
The Pros’ of Mortgage Protection Insurance
- Guaranteed Approval: Most MPI is guaranteed approval with no medical exam. So if you are in bad health, work a high risk job, or participate in a dangerous hobby, then MPI will be a good option to look at.
- Peace of mind: If you were to pass away the MPI would pay off the exact amount owed on your mortgage. You will always know that your loved ones will retain their home if the unexpected happens.
- Disability Income: Depending on the policy, some MPI comes with a rider that will pay your mortgage payment if you become disabled or unemployed. This benefit is usually for a limited time period.
The Cons’ of Mortgage Protection Insurance
- Flexibility is limited: With MPI, the lender is the beneficiary of the policy and the policy is used to pay off the mortgage, nothing else. Your loved ones have no say so, and do not have the option to use for any other obligation.
- Price is higher: Term life insurance is usually going to less expensive than mortgage protection insurance, especially if you are healthy. Also, MPI rates are not always guaranteed to remain level.
- Coverage decreases: As we mentioned above, MPI is a decreasing term policy. This means as the amount owed on your mortgage decreases, so does the death benefit on your mortgage protection insurance. Ultimately you are paying the same premium for less coverage over time.
- Age limits are restricted: MPI usually has more restrictions how old you can be to purchase and how long you can have the coverage for. To give you an example, most MPI policies won’t issue a 30 year benefit period to anyone 45 and above.
Term Life Insurance
Term life insurance, most of the time is a better option to protect your home than mortgage protection insurance. It is designed to pay the benefit to your choice of beneficiary if death occurs during the term period.
The Pros’ of Term Life Insurance
- Flexibility: You get to name the beneficiary of your term life policy, which allows them to decide how the benefit is used. They can still pay off the mortgage, but can also use it for other financial obligations such as:
- Replacing lost income
- College tuition for kids
- Funeral Expenses
- Retirement Income
- Less costly: Most of the time, especially if you are in good health, term life insurance is going to be cheaper than MPI. The biggest misconception is how much consumers think term life insurance costs, in fact, 85% overestimate the costs.
- Level death benefit: The death benefit never decreases with a term life policy. The coverage you select during the application stays the same for the duration of the contract.
- Level premium: Just like the death benefit, premiums are guaranteed on term life insurance policies. MPI premiums can increase as you get older.
- Fewer restrictions on age limits: You can purchase term life polices for longer periods at older ages than you can with MPI. For example, AIG Select-A-Term can be purchased by a 55-year-old for 30 years.
- Living Benefits Rider: More and more term life policies are offering the rider referred to as “living benefits”. This rider allows you access to a percentage of the death benefit early if you were to become chronic or critically ill (such as heart attack, stroke, or cancer).
The Cons’ of Term Life Insurance
- Qualifying is harder: Approval is not guaranteed like it is with most mortgage protection insurance. You will have to qualify for the coverage and your premium is based your overall health status, background history, driving record, and financial issues. If you have a history of health problems, getting approved for a traditional term life policy could be difficult.
- Some control is lost: Since you are able to name your beneficiary on a term life policy, you have to trust that the right choices are made on how to spend the death benefit. With a MPI policy, you always know the death benefit is going to be used to pay off the mortgage.
The 5 Best Term Life Insurance Policies used for Mortgage Protection
We have compiled a list of the 5 best term life policies that you should look at when shopping for mortgage protection insurance. Here they are:
- American National: Competitive rates and all term life insurance comes with the living benefits rider at no charge. No-medical exam required for amounts under $250,000.
- AIG-American General: Very lenient underwriting with term limits that increase in 1 year increments. Longer term periods available for older consumers. Rates are very competitive.
- North American Company: Rates for older consumers are usually the best around. There term life policies also come with the living benefits rider at no extra cost.
- Assurity: Term life insurance policies with no medical exam up to $500,000 for clients age 18-50 and up to $350,000 for ages 51-65. Also has a return of premium rider that can be added.
- Transamerica: Although not always priced competitively, it does fit some age groups especially females between the age o 45-65. They also offer a living benefits rider for an additional cost.
My Two Cents
If you owe nothing on your home, or already have sufficient life insurance in-force, then mortgage protection insurance would be a waste of money. If you don’t have the sufficient amount of life insurance to cover your mortgage, then consider purchasing more.
Term life insurance will be more flexible and probably less expensive. However, if you have health problems, a high risk job, or high risk hobby then mortgage protection insurance might be a good fit.
Before making any decisions, be sure to contact your agent or give us a call. It’s always best to work with an independent agent, like us, that has access to multiple carriers. This ensures that you will get a policy that not fits your needs, but also your budget. We hope this article was helpful and if you have any questions or comments let us know.
