A mortgage is a long commitment for homeowners — 30 years, to be exact, if you’re part of the 90% of homebuyers with a 30-year fixed rate loan. Even if you select a shorter loan term — say, a 15-year fixed rate mortgage or a 7-year adjustable rate mortgage — you’ll be making monthly payments for the foreseeable future.
But what if the unthinkable happens and you’re unable to continue paying your mortgage? That’s where mortgage protection insurance (MPI) can help. If a borrower were to pass away or lose the ability to hold down steady employment — for instance, due to an injury or medical issue — MPI could cover the principal and interest on the home loan.
As a homeowner with a mortgage, you need to plan for the future. Let’s take a hard look at what mortgage protection insurance has to offer so you can decide if it makes sense to secure coverage for yourself and your family.
Insurance is a fact of life for anyone who buys a home. In fact, homeowners insurance is one of the most expensive housing costs you’ll pay each month. And depending on where you live, you may be required to purchase additional hazard insurance policies to cover threats like flooding, hurricanes and earthquakes.
Mortgage protection insurance is a completely different type of insurance, though. In fact, it’s helpful to think of MPI as a special type of life insurance. While homeowners insurance compensates you if something happens to your house, MPI compensates your family (and, in some cases, your lender) if something happens to you.
A mortgage protection insurance plan is an insurance policy that helps you or your family continue repaying your home loan in the event that you are no longer able to do so. In many cases, MPI plans solely cover events in which the primary borrower dies. That being said, certain policies may give you access to your death benefit for certain covered critical or chronic illnesses like a diagnosis of heart attack, cancer or stroke.
If you were to pass away before you finished paying off your home loan balance, your mortgage protection life insurance policy could provide the funds to continue making monthly payments in your place or even fully repay your mortgage. Grieving families face enough hardship as it is; worrying about paying the mortgage each month when the primary breadwinner is gone may be too much to bear. But MPI can help alleviate those concerns altogether.
When you buy MPI, your policy could cover the length of your home loan. So, if you have a 15-year fixed rate mortgage, your MPI plan could run for 15 years.
MPI is sometimes also referred to as mortgage life insurance — or even mortgage death insurance — because it pays a benefit when the policyholder dies, just like standard life insurance. Some mortgage protection plans will provide more coverage than that, but even the most basic policies should cover the death of the mortgage holder. There may be exclusions that prevent beneficiaries from receiving a payout — if the policyholder were to die by suicide (in the first two years) rather than natural causes or accident, for instance.
What if there are multiple borrowers on a home loan, though? In many cases, you can buy mortgage protection to cover two — possibly more — co-borrowers or cosigners on a home loan. If one of the insured borrowers dies, then the named beneficiary typically receives the proceeds.
As we noted, mortgage payment protection insurance can include special riders — known as living benefit riders — that cover chronic or critical illness. They may also provide coverage for severe injuries that prevent policyholders from working at full capacity. In these cases, borrowers are still alive, but due to diminished earnings, are unable to make monthly mortgage payments in full.
Every insurance provider or lender will approach this issue differently, so it’s always wise to carefully review coverage options with a trusted, licensed representative who specializes in this coverage before buying any kind of mortgage protection life insurance coverage.
Mortgage protection insurance can cover just about any housing cost you want. Repay your entire home loan in one go? You can do that. Put down just the minimum monthly payment on your home loan? Absolutely. Make extra payments on your mortgage to build equity and pay back your loan more quickly? That’s an option, too.
As we said earlier, MPI is a special type of life insurance. Once those funds hit your bank account, you can use them any way you like. Spend that money on your monthly housing costs, save it for a rainy day or cover other expenses like medical bills, car payments and tuition.
Where MPI can truly set itself apart from term life insurance is with living benefit riders. Accessing your death benefit early can really pay off for anyone who’s experienced a covered chronic ailment, critical illness or severe injury that impacts your cash flow. Serious medical issues can require treatments like chemotherapy or invasive surgery that disrupt your ability to work at full capacity — or at all.
A living benefit rider for chronic or critical Illness allows policyholders to accelerate their face amount or just a portion of it while you’re still alive. This is done through a practice known as acceleration. The insurance company pays out a certain percentage of the benefit early — i.e., accelerates it — and then pays the remaining when the policyholder dies.
As a policyholder, if you choose to accelerate your mortgage protection insurance payout, you can do so in just about any quantity you like. For instance, take 20% now and retain the rest as your death benefit. The choice is entirely yours to make.
We should reiterate that not all insurance providers offer living benefit riders. Given how useful they can be for families dealing with hardship, though, it may be worth seeking out an insurance professional who specializes in these types of policies.
In the vast majority of cases, MPI benefits are paid out to the policyholder’s beneficiaries. They can then spend that money any way they like. If you were to receive an MPI death benefit, you could pay down your mortgage in full or simply keep up with your monthly payments while putting those funds to use for other expenditures. The choice is yours entirely.
That is, unless you take out a credit life insurance policy. These insurance plans give the death benefit directly to your lender, who would then pay off your mortgage. The money would never touch your hands. In truth, though, credit life insurance is incredibly rare, so you’re unlikely to come across it.
Mortgage protection insurance can offer peace of mind for anyone worried about what the future holds, especially if the unthinkable happens. Protecting your income and your home is a top priority for just about any homeowner, so there’s plenty to consider here. If any of the following circumstances sound familiar, you may want to explore your MPI options:
This is a case when the mortgage lending industry’s penchant for acronyms can become a bit of a headache. MPI, PMI and MIP are all distinct mortgage concepts, but it’s easy to get them confused — especially since each one includes some variation of “mortgage insurance.” Here’s a helpful reminder to keep them straight:
You don’t receive any kind of payout or benefit from PMI or MIP — both exist entirely to protect the lender from the risk of borrower default.
Mortgage protection insurance is a unique form of life insurance that helps bereaved families keep up with mortgage payments after the death of a homeowner. In fact, the death benefit from an MPI policy can repay whatever’s remaining on your loan balance. In other cases, beneficiaries can use payouts at their discretion and tap into those funds to cover monthly mortgage payments.
MPI can be a useful way to provide families with some much-needed financial protection, staving off foreclosure and repaying the mortgage in full. Some policies may even offer living benefit riders to cover living expenses after suffering a debilitating injury or illness.
If you’re interested in using MPI to protect both your income and your home, speak with a licensed insurance expert to go over your options. There’s no one-size-fits-all life insurance plan out there; they can help you tailor your policy to your unique circumstances and the specific needs of your family. A licensed, knowledgeable insurance specialist can answer any questions you have and help you make the best decision possible.
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