MORE LIKE THISLife insurance providersLife insurance policy typesManaging life insuranceBuying life insuranceInsuranceLife Insurance
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.
» MORE: How much life insurance do I need?
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.
» MORE: Mortgage life insurance vs. term life
Find the right life insurance plan for you
Make sure you and your loved ones are covered - compare customized life insurance quotes from our partners.
Compare with Policygenius
FAQs
This type of credit life insurance helps pay all or a portion of your mortgage balance if you die or, in some cases, covers your monthly home loan payments if you become disabled, critically ill or unemployed.
What is the average cost of mortgage protection insurance? ›
Some insurers may also consider your age and life circ*mstances. According to Nolo.com, premiums for mortgage protection insurance typically range from $20 to $100 per month.
What's the difference between life insurance and mortgage protection insurance? ›
Mortgage protection insurance, or MPI, pays off your mortgage in the event of your death. A life insurance policy pays out a death benefit to your beneficiaries, which they can use for any purpose. If you have sufficient life insurance coverage, mortgage protection insurance probably isn't necessary.
When can I stop paying mortgage protection insurance? ›
You can often request PMI removal once you own 20% equity in your home. And lenders generally must drop PMI automatically when your loan-to-value ratio (LTV) hits 78%. In this article, we'll go over the basics of PMI and what it covers, and we'll also show you how and when you can stop paying it.
What is the mortgage protection insurance scandal? ›
Banks and other lenders sold PPI to their customers without fully explaining what it covered. In the worst case scenarios, the banks/lenders lied to customers by telling them it was a compulsory element of a loan, or they simply added it without the borrowers' consent.
Does everyone need mortgage protection? ›
Is MPI Ever Required? Unlike some insurance products that are required when you buy a home, MPI is optional. However, MPI may be worthwhile to get under certain circ*mstances.
How many people buy mortgage protection insurance? ›
Texas clocks in as the state with the most insured homeowners, with more than 89,000 having an insured mortgage loan. Flroida took second with 77,000 insured homeowners, while California (71K), Illinois (48K) and Ohio (43K) rounded out the top five.
How much is mortgage insurance on $300 000? ›
But in general, the cost of private mortgage insurance, or PMI, is about 0.5 to 1.5% of the loan amount per year. This annual premium is broken into monthly installments, which are added to your monthly mortgage payment. So a $300,000 loan would cost around $1,500 to $4,500 annually — or $125 to $375 per month.
How long do I pay mortgage insurance? ›
Types of private mortgage insurance
You'll be able to stop paying them once you reach 20 percent equity in your home — if you request cancellation — or automatically when your mortgage balance reaches 78 percent of your home's value.
Is it good to have mortgage insurance? ›
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home need to pay for mortgage insurance.
Like traditional life insurance policies, mortgage protection safeguards what many consider their largest asset and financial obligation, their home. Property owners may acquire such a policy from most insurance companies up to the age of 80.
Does mortgage protection insurance require a medical exam? ›
Mortgage life insurance policies generally don't require a medical exam and, in some cases, may not even ask health questions.
What are the benefits of mortgage protection insurance? ›
Not to be confused with private mortgage insurance (PMI), mortgage protection insurance (MPI) helps cover your mortgage payment if you die or become disabled and can't work. MPI is similar to life insurance, but the beneficiary is the deceased's mortgage lender.
Is there a waiting period for mortgage protection insurance? ›
Plans usually take effect immediately, unlike other types of life insurance that enforce a waiting period. Though premiums remain level, the policy's value decreases with your remaining mortgage balance. You make premium payments to the policy issuer, usually your mortgage lender.
Is mortgage insurance tax deductible? ›
Is mortgage insurance tax-deductible? No, private mortgage insurance isn't tax-deductible now. The mortgage insurance deduction was only available for eligible homeowners for the 2018–2021 tax years.
Is there any benefit to mortgage insurance? ›
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home need to pay for mortgage insurance.
Is mortgage protection essential? ›
Mortgage protection insurance isn't compulsory, but you should think very carefully about how you will keep up mortgage repayments if you find yourself out of work for a while. You might choose to do this using mortgage protection insurance, or with some other method.
What is the primary purpose of private mortgage insurance? ›
Private mortgage insurance (PMI) is a type of mortgage insurance you might be required to buy if you take out a conventional loan with a down payment of less than 20 percent of the purchase price. PMI protects the lender—not you—if you stop making payments on your loan.
Do I need a mortgagee protection clause? ›
From a tenant's point of view, if the tenant accepts a lease without a mortgagee protection clause, then it may find it more difficult to assign or refinance in future. Any new lender may insist that the lease is varied to include a mortgagee protection clause, which could lead to delays and additional costs.
