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Mortgage Protection Insurance: What to Avoid

Mortgage protection insurance will pay off your mortgage when you die, but it comes at a relatively high cost.
Aug. 7, 2020
Insurance, Life Insurance
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Your home is one of the biggest investments you’ll ever make, which is why families carrying a mortgage often need life insurance. If one of the breadwinners dies, a life insurance payout can help the family keep up with mortgage payments and stay in the home.

Mortgage protection insurance, also called mortgage life insurance or mortgage protection life insurance, can be a way to pay off a mortgage, but it doesn’t take the place of regular term life insurance.

How mortgage life insurance works

As the name implies, mortgage life insurance is a policy that pays off the balance of your mortgage should you die. It often is sold through banks and mortgage lenders.

The payout goes to the mortgage lender, not your family. The payout matches your mortgage balance, so the amount decreases over time.

» MORE: How much life insurance do I need?

Who needs mortgage protection insurance

Your bank or mortgage lender may try to sell you a mortgage protection insurance policy. This means that, even if you die, they’ll get paid. Because the lender is the named beneficiary, your family won’t get any money from the policy.

Be aware that the terminology can be confusing:

  • Mortgage protection insurance (MPI) is a type of credit life insurance, which means you aren’t required to purchase it.
  • Private mortgage insurance (PMI) is a different product. Your lender can require you to buy private mortgage insurance if your down payment is less than 20%.

The inflexibility of mortgage protection insurance payouts means you’re usually better off with a regular term life insurance policy with enough coverage to pay off your mortgage. Then, if the mortgage decreases, your family can pay off the mortgage and keep the extra cash. They can also choose to skip paying off the mortgage all at once and use the money as they see fit.

A mortgage life insurance policy locks your loved ones into paying off the mortgage, even if other bills and needs are more pressing.

The biggest benefit of mortgage protection insurance is its convenience. It lines up exactly with your mortgage balance and there’s usually no life insurance medical exam required to buy a policy.

If you’re denied for term life insurance or whole life insurance coverage for medical reasons, mortgage life insurance may be an option to financially protect your home.

Mortgage protection coverage can supplement an individual life insurance policy. For example, if your mortgage is paid off with money from a mortgage life policy, then your family could use all the benefits from your term or whole life insurance policy for bills and other expenses.

» MORE: Compare life insurance quotes

Reasons not to buy mortgage protection insurance

Mortgage protection insurance has limited advantages and serious drawbacks.

The biggest downside is the drop in total paid out. Even though your premiums stay the same, the payout amount keeps decreasing as you pay your mortgage off. And that premium is often much higher than what you would pay for term life insurance.

It’s easy to think that mortgage life insurance helps the lender more than your family because the bank gets the money if you die. While the payout can take away the financial stress of paying a mortgage, your family could still be left with bills and other debt they can’t afford.

With a regular life insurance policy, your family can use the payout for the most pressing bills, whether it’s mortgage payments, other loans or college tuition.

A term life insurance policy can provide more bang for your buck than a mortgage life insurance policy. A term policy allows you to choose the amount of coverage and policy length. If you want to line those options up with your mortgage, you can, but you’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.