Mortgage Protection Insurance: What It Is and When You Might Need It
Mortgage protection insurance pays off your mortgage if you die. But for most people, term life insurance is a better deal.
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The promise of mortgage protection insurance (MPI) — also known as mortgage life insurance — is simple and appealing. When you die, the policy pays off your mortgage, and your loved ones can keep the house.
But MPI isn't necessarily the best way to achieve that goal. For many people, a term life insurance policy can be a cheaper, more flexible option.
How does mortgage protection insurance work?
Mortgage protection insurance is a type of life insurance that pays off the balance of your mortgage when you die. The life insurance death benefit from an MPI policy typically decreases as you pay off your mortgage, while your premiums stay the same.
You might also see mortgage protection insurance referred to as “mortgage life insurance” or “mortgage protection life insurance.”
Mortgage life insurance is typically sold by mortgage lenders, and they're the ones who get paid if you die. (This is different from a normal life insurance policy, where the death benefit goes to your chosen beneficiaries, like your family members.)
Mortgage protection insurance: Key facts
Mortgage life insurance is similar to decreasing term life insurance, except your lender — not your loved one — gets the payout if you die while the policy is in effect.
Pros and cons of mortgage protection insurance
Mortgage protection insurance has limited advantages and serious drawbacks, especially compared to other types of coverage, like term life insurance.
Convenience. Mortgage protection insurance aligns with your loan balance and pays the lender directly.
No medical exam. In most cases, you're not required to take a life insurance medical exam to qualify for coverage.
Lack of flexibility. MPI pays the lender, so your family won’t have the freedom to spend the money as they like.
Declining payout. While premiums stay the same, the payout decreases as you pay down your mortgage.
Higher premiums. Premiums for MPI are often much higher than term life insurance.
» MORE: Benefits of term life insurance
Who is mortgage protection insurance for?
You might want to consider mortgage protection insurance if your goal is to deal with mortgage debt and help loved ones keep the house after you die.
Because it generally doesn’t require a medical exam, mortgage protection insurance could be a good fit for people who don’t qualify for traditional term life insurance. If your health would disqualify you from term life insurance or leave you paying high premiums, mortgage protection insurance can help your family cover the cost of your mortgage when you die.
But if you’re in decent health, applying for term life insurance might be a cheaper way to accomplish the same goal.
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.
Is mortgage protection insurance required?
You don't need 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?
With similar 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 down payments as low as 3.5%.
» MORE: Compare life insurance quotes
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