What is Mortgage Protection Insurance?

As a homeowner, it’s essential to have a plan to keep your loved ones protected just in case of the unexpected tragedy. This is where mortgage protection life insurance becomes an important addition to your financial portfolio. This is a valuable tool for financial planning, that gives families the opportunity to remain in  their homes in the event of a disability or an untimely death.

Mortgage protection life insurance is a safety net in case life doesn’t goes as planned and, which is why most homeowners want to ensure that their loved ones are well-protected.

Unfortunately not all people will purchase mortgage protection insurance. They will roll the dice and if the payer of the mortgage dies, this could result in most families having to sell their house within the course of one or two years because they can’t afford to live their any longer. Is that a risk worth taking?

Mortgage Protection Insurance: What Is It?

Mortgage protection insurance, or MPI, is a decreasing term life insurance policy meant to pay off the home if you pass away, or in some cases, make the mortgage payment if you were to become disabled and couldn’t work.

In most families, there are two income-producing members who are usually vital in being able to afford and maintain the cost of their mortgage and other household bills.

In some cases, when one of the those bread winners passes away, the household’s income gets reduced drastically. The could  leave the one income-producing member left to pay for everything, which may not be an option if mortgage protection insurance is not provided.

Why Is Mortgage Protection Insurance Important?

The reason is quite simple actually; it follows the saying “better safe than sorry.” Having a safety net for when things change for the worse is a wise choice.

Mortgage protection life insurance is a policy that can save a family’s future and help get through financially during a loss.

Mortgage Protection Insurance vs Term Life Insurance 

Is Mortgage Protection Insurance and Term Life Insurance the same? The short answer is yes. However, there are some differences between them that can create some confusion among consumers. 

• The majority of term life insurance policies require a physical examination, blood work, and urine sample. This process could sometimes take weeks if other information is required after the exam is completed, such as doctor records. Mortgage protection life only requires the consumer to answer a few health questions to qualify for coverage. Coverage is usually approved within 24 hours, and is used primarily when pre-existing health conditions could keep you from qualifying for a traditional term life policy.
• Mortgage protection life is a decreasing term, which means the benefit amount decreases over time, while the premium remains level. This decrease is correlated with the amount owed on your mortgage. Traditional term life insurance has a level death benefit for the term period chosen.
• A major difference is who your beneficiary will be. With mortgage protection life, the lender is the beneficiary of the policy. The lender uses the death benefit to pay off any remaining mortgage upon the death of the insured. The money cannot be used for anything else, such as funeral expenses, college tuition, or any other debt. With a term life policy, the insured names his beneficiary, and the money can be used for any needs necessary.

What are These Letters I Keep Getting in the Mail?

If you happen to purchase, get a HELOC (home equity line of credit), refinance, or do a reverse mortgage, then your lender has to file paperwork in the courthouse by law. These documents are available to the public and can be accessed by anyone.

Several life insurance companies obtain these public records and use them to do a mass marketing mail campaign targeting consumers who have just purchased a home or refinanced.

The letters are can be vague and dressed up to look like they are coming from your bank. They encourage you to fill out some information and send back.

Once you have sent them back they are sold to licensed agents who then begin the process of trying to sell you their mortgage protection insurance. 

All of the products being offered will pretty much be the same, just be issued from different life insurance companies. It’s always important to work with an experienced agent, which we talk about next.

Choose an Experienced Agent

Choosing an experienced agent could save you  money when looking to buy mortgage protection insurance. Mortgage protection insurance, while more liberal in underwriting qualifications than traditional life insurance, can also be more expensive than term life insurance. 

Settling on the first policy you come across could cost you money. If healthy term life policies are always a better choice just for the difference in premium costs. An experienced agent will be able to shop around and find you the best policy that meets your needs.

If you have pre-existing health conditions it’s even more important for you to find an agent that is knowledgeable and understands the underwriting niches at multiple life insurance carriers. This will keep you from having to apply with multiple companies and wasting a bunch of time. An experienced agent will know whether or not you can get coverage, which company’s underwriting will best fit you, or if a no-medical mortgage protection life policy would fit best.

Riders Offered with Mortgage Protection Insurance

Most mortgage protection life policies and traditional term life offer add-ons or riders. These provide extra coverage at an additional cost. These riders include:

• Disability Income
• Waiver of Premium
• Living Benefits/Critical Care
• Spousal Term Life Rider
• Child Rider 

What happens if I Sale or Refinance My Home?

If you buy your mortgage protection insurance through your lender, this could lead to disaster. If you refinance, buy a new house, or your lender sales your mortgage, you could lose your coverage. 

If any of the three above occur, you would have to re-qualify for a new policy, which could be difficult if your health status has changed. Also, since you have gotten older, the premium will be more expensive.

With a traditional term life policy, the contract travels with you. If you sale your home, buy a new home, or refinance you can keep your original policy. You will be required to do a new exam if you need more death benefit.

Is My House Protected if I Already Have PMI?

PMI, or private mortgage insurance, is necessary when you don’t put 20% down in a home purchase. If you buy a $150,000 house with a$15,000 down payment, you’d need to have PMI until you pay your house loan down to $120,000.

Private mortgage insurance is meant to protect the bank in case you stop paying and default on your loan. It acts as a 20% cushion that covers the costs of selling and foreclosing your house.

In other words, PMI is not Mortgage Protection Insurance.

What if I Already Have Life Insurance?

This all depends on how much life insurance you have inforce. If you just bought your home, then most of the time you won’t have enough life insurance in place. A home is a new and expensive debt that may not be accounted for when you first purchased life insurance. 

It’s a common mistake to under value how much money it takes to pay off one’s mortgage and replace their income when they’re gone.

As a general rule, most widowers stay in that state for 8 to 10 years, which is a pretty long time to live on their own and survive while also paying the mortgage and taking care of the other financial duties and difficulties that might occur during that decade.

This is why it’s recommended to have 8-10 times your annual salary in life insurance to ensure your loved ones are financial cared for. Check out our life insurance calculator here.

Our Thoughts

When your family buys a home, the dream of living somewhere forever comes true. The memories that are made last a lifetime. This is why protecting your investment (your home) should be on the top of your to-do list. Life insurance can protect your loved ones, the way they are accustomed to living, and give you piece of mind. We hope this article answers any questions you have about mortgage protection insurance. If you have any questions, please don’t hesitate to give us a call.

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