Mortgage Protection Insurance: What It Is and When You Might Need It
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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 loved ones 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.
» MORE: Term life insurance definition
What is mortgage protection insurance?
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 life insurance death benefit from an MPI policy typically decreases as you pay off your mortgage, while your premiums stay the same.
How does mortgage protection insurance work?
Mortgage life insurance is often sold through banks and mortgage lenders instead of life insurance companies. Its purpose is to ensure your home is paid off if you die with an outstanding balance on the loan.
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 your chosen beneficiaries, like your family members. But with an MPI policy, the beneficiary is the lender, who will be paid the remaining balance of your mortgage.
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. Policies are typically guaranteed, so 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
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 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 down payments as low as 3.5%.
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