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The promise of mortgage protection insurance, or MPI, is simple and appealing — when you die, the policy pays off your mortgage, and your heirs can keep the house. But the reality is more complex. For many people, a term life insurance policy can be a cheaper, more flexible option.
How does mortgage protection insurance work?
As the name implies, mortgage protection insurance (also called mortgage life insurance and mortgage protection life insurance) is a policy that pays off the balance of your mortgage when you die. The death benefit from an MPI policy typically decreases as you pay off your mortgage, while your premiums stay the same.
This type of insurance is often sold through banks and mortgage lenders as opposed to life insurance companies. The reason lenders like mortgage life insurance is simple — they're the ones who get paid if you die. The death benefit of a normal life insurance policy goes to beneficiaries you choose. But with an MPI policy, the beneficiary is the lender, who will be paid the remaining balance of your mortgage.
Is MPI required?
You are not required to buy mortgage protection insurance. However, there are other types of insurance that can be mandatory for certain home loans, such as private mortgage insurance.
What’s the difference between MPI, PMI and MIP?
When referred to by their abbreviations, mortgage protection insurance, private mortgage insurance and mortgage insurance premium can be easy to mix up. Here's a bit about each:
Mortgage protection insurance, or MPI, is a type of credit life insurance. You aren’t required to purchase it, and it pays the lender instead of your beneficiaries.
Private mortgage insurance, or PMI, is a type of insurance that your lender can require you to purchase if your down payment is less than 20%.
Mortgage insurance premium, or MIP, refers to a type of mortgage insurance required for FHA loans, which allows for very low down payments, such as 3.5%.
Pros and cons of mortgage protection insurance
The inflexibility of MPI payouts means you’re usually better off buying a regular term life insurance policy with enough coverage to pay off your mortgage. Then, when you die, your family has options:
They can use the death benefit to pay off the house and keep any leftover cash.
They can choose to skip paying off the mortgage and use the money as they see fit — it's their money, not the lender's.
» MORE: How does life insurance work?
Advantages of mortgage protection insurance
Convenience. The biggest benefit of mortgage protection insurance is its convenience. It lines up exactly with your mortgage balance and pays the lender directly.
No medical exam. If you’re denied for term life insurance or whole life insurance for medical reasons, you may want to consider mortgage life insurance. Policies are typically guaranteed, which means you’re not required to take a medical exam to qualify for coverage.
» MORE: Compare life insurance quotes
Disadvantages of mortgage protection insurance
Mortgage protection insurance has limited advantages and serious drawbacks.
Lack of flexibility. The payout from an MPI policy goes directly to the lender to pay off the balance of your mortgage, but that may not be the best financial move for your family. For example, if your mortgage has a low interest rate, your family may want to continue making the regular mortgage payments and use the life insurance payout for more pressing bills like credit card debt or college tuition.
Declining payout. Even though your premiums stay the same, the payout amount decreases as you pay down your mortgage. To compare, the death benefit of a standard life insurance policy typically stays level throughout the length of the coverage, which means your beneficiaries receive the full amount no matter when you die.
Higher premiums. Premiums for MPI are often much higher than what you would pay for term life insurance. That’s because term life typically uses full medical underwriting — a process that takes your health into account when calculating rates. You may have to complete a medical exam to buy a term life policy, but with a clearer picture of your health, the insurer can charge lower rates.
Mortgage protection insurance vs. term life insurance
A term life insurance policy typically provides more bang for your buck than a mortgage life insurance policy. That’s because term life allows you to choose your coverage amount and policy length, and offers level premiums and death benefits. Plus, the payout can be used for any purpose. If your family wants to use the money to pay off the mortgage they can, but they’re not forced to.
In short, term life offers most of the benefits of mortgage protection insurance but with lower premiums, more flexibility and more control.