What Is Mortgage Protection Insurance And Is It Worth It?

If you’re like most Americans, your home is your biggest purchase and a key component of your retirement plan. It’s also where your family gathers, creating memories to treasure for a lifetime. As such, protecting your home is essential. Mortgage protection insurance can be vital in ensuring your loved ones keep your home if you pass away or become disabled.

What Is Mortgage Protection Insurance (MPI)?

Mortgage protection insurance (also called MPI) is a policy that ensures that the borrower’s mortgage will be paid off in the event of their passing. Some insurance companies may even cover the monthly mortgage payments if a homeowner becomes disabled or loses their job.

The purpose of MPI is to help your loved ones prevent foreclosure if you lose the ability to pay your mortgage. Since your beneficiaries usually only help with the mortgage if you pass away, your MPI functions as a type of life insurance policy. Your policy can also include disability or unemployment in addition to the death benefit.

MPI differs from a traditional life insurance policy in that it only covers your mortgage, and the policy’s value decreases as the remaining mortgage balance decreases. As a result, MPI that kicks in a few years after you purchase your home will pay out much more than for a mortgage you’ve paid for a couple of decades.

MPI Vs. PMI Vs. MIP

Private mortgage insurance (PMI) is insurance that homeowners may have as well. However, PMI protects the lender rather than the borrower. Lenders require borrowers who make a down payment of less than 20% of the home’s purchase price to purchase PMI. The small down payment signifies increased risk to lenders, and lenders require PMI to reduce their risk.

PMI costs 0.1% – 2% of the mortgage balance every year. For example, a mortgage of $200,000 with a PMI of 1.5% would cost the borrower $3,000 over a year. Usually, you pay your PMI in monthly installments along with your mortgage, which is helpful because it breaks the payments up throughout the year. When homeowners reach 20% equity in their home, they can ask their lender to terminate PMI.

Lenders don’t require borrowers to purchase MPI. Unlike with PMI, borrowers have the choice of whether they want the protection that MPI affords. Remember, the stark difference is that MPI protects you while PMI protects the lender. In the event of your death, PMI will not prevent your home from going into foreclosure.

Taking out an FHA loan to finance your home will entail paying mortgage insurance premiums (MIP). MIP protects lenders and the FHA from you defaulting on the loan. This protection is in place because FHA loans present more risk with reduced credit requirements and smaller down payments. Therefore, borrowers must pay 1.75% of the loan at closing for MIP. Afterward, you continue paying for MIP each month as a small percentage of your mortgage balance.

How Much Is Mortgage Protection Insurance?

You will likely pay at least $50 monthly for MPI. Additional factors, such as your mortgage balance and how far you are from paying off your mortgage, affect the price of your premium as well.

While MPI companies will also assess your occupation and age when creating your policy. However, unlike life insurance, your MPI provider will not require you to get a medical exam. Therefore, whether you are in good health or have specific health conditions, it won’t influence the price or underwriting process.

Mortgage Protection Insurance FAQs

You can learn more about MPI policies through the following frequently asked questions.

Is mortgage protection insurance worth it? 

Mortgage protection insurance might not make sense for all homeowners. Your individual circumstances will help you determine whether MPI is worthwhile. You’ll need to weigh the advantages against the costs to determine if it’s worth the investment. 

Benefits of MPI:

• Extra financial security if you pass away unexpectedly
• No health exam or underwriting process is necessary
• Knowing your family members will not have financial difficulty from the house they inherit
• Flexibility to add more benefits based on your needs

Cons of MPI:

• Another insurance policy means another monthly payment
• Benefit activates in the event of your death only if the mortgage balance is large enough or if enough time remains on the mortgage
• Possible payout diminishes as time passes
• Your lender, not your family, receives direct payment from the policy

Who sells mortgage protection insurance?

There are several types of service providers that sell mortgage protection insurance products. If you’re shopping for MPI, consider the following sources for a policy: 

• Your mortgage lender. Ask your lender if they sell MPI policies. If they don’t, see if they will refer you to a lender that does. Most providers will not sell you a policy you closed on your home more than five years ago.
• A life insurance company. Many life insurance companies also sell MPI policies. If you have a life insurance policy already, you might be able to bundle your existing life insurance and MPI with your insurance company to lower your premium.
• A private insurance provider. Depending on your region, private insurance companies in your area may provide MPI policies.

If you’re interested in MPI, once you close on your home, it’s crucial to start shopping for policies straight away. Many MPI providers will not sell policies to homeowners who have been in their homes for more than a few years. Therefore, while comparing rates from a few different providers before purchasing insurance is advantageous, it’s a good idea to move quickly.  

Why is mortgage protection insurance important? 

Mortgage protection insurance is important because a home is a significant investment for most people. If you lose the ability to earn money or pass away, your family may end up without a place to live. An MPI policy is a security measure that protects your family’s financial state and prevents the potential for foreclosure of your home. In short, MPI can provide peace of mind and financial protection for you and your loved ones. 

The Bottom Line

Mortgage protection insurance takes care of your mortgage payments in case you become disabled or pass away. MPI allows your beneficiaries will keep your home through payments that your lender directly receives from your insurance company.

Your policy is an additional layer of financial protection for your loved ones, and it does not require a health exam for you to qualify. However, most MPI providers will not give you a policy if you’re more than a few years into your mortgage, and your payout decreases the longer you pay your mortgage.

If you want to learn more about protecting your home, consider hazard insurance. Hazard insurance is a part of your homeowners insurance that protects you from damages caused by fires, theft, vandalism, and more.