Mortgage Protection Insurance

Mortgage protection insurance (MPI) is a very niche and specific insurance product. Its use case is for liability-linked insurance. MPI is a decreasing term life insurance product that covers your outstanding mortgage balance if you die. It can also help pay some or all of your mortgage if you become disabled.

You have probably received junk mail offering mortgage protection insurance if you are a homeowner. You likely just tossed it away, uncertain of what it was. After reading this post you will know.

Life insurance is the main component of the protection sleeve under the 5 pillars of personal finance. Therefore, it is important to know your options so you can make an informed choice.

So what is mortgage protection insurance and can it be right for you?

What Is Mortgage Protection Insurance?

Mortgage protection insurance is a decreasing term life insurance product that covers your mortgage. The product is typically designed so that the coverage amount (aka death benefit) decreases similar to your mortgage balance. Additionally, it can often be used to cover some or all of your mortgage payments if you become disabled.

MPI is a niche life insurance product with a very specific use case, to fully pay off a major debt. Most MPI is paid directly to your lender, although more products are coming to market that pay out to your named beneficiary.

Since your life insurance coverage needs tend to decrease over time, you can wind up being over-insured later in life with conventional flat coverage. MPI is one way to ensure you are fully-covered early in life, without paying for more insurance than you need as you age.

Most commonly used life insurance calculation methods include your mortgage as major part of the formula. Mortgage protection insurance allows you to match this expense.

MPI is different than homeowners insurance that protects you against worst-case scenarios that damage your property. Additionally, MPI only covers the principal and interest portion of the mortgage. Items like property taxes, homeowners insurance, and HOA fees would still be due. Although, some MPI products do have optional riders that cover these additional expenses.

There are also policies hat help cover or reduce your monthly mortgage payment if you get disabled, also referred to as MPI.

However, mortgage protection insurance is not a good fit for everyone.

Do You Need Mortgage Protection Insurance?

MPI is not always financially prudent and is not required for most mortgages. Unlike homeowners insurance which banks typically make mandatory as part of the mortgage loan.

You can get a similar level of coverage with a level life insurance product. Additionally, you can set up a term insurance ladder that decreases as your mortgage pays off. Albeit, a term ladder won’t match your mortgage amortization as closely as MPI.

A common formula to determine your coverage needs is the DIME calculation. DIME stands for debt, income, mortgage, and education. Under the DIME method, you:

• Add up all your outstanding debt including your mortgage
• Include any education expenses for children you want covered if you pass
• Account for future expenses for your family
• Subtract existing insurance, including any self-insurance

The resulting number is how much life coverage you would purchase.

MPI vs PMI vs MIP

There are a lot of acronyms and similarly named products when it comes to insurance. It is easy to confuse mortgage protection insurance (MPI) with private mortgage insurance (PMI) or mortgage insurance premium (MIP).

The main difference is MPI protects you while PMI and MIP protect the lender (the bank). In short, the different products are:

• Mortgage Protection Insurance (MPI): A life insurance policy that pays off the balance of your mortgage when you die. This protects your loved ones from having the debt after you pass.
• Private Mortgage Insurance (PMI): Is usually required on mortgages if you put less than 20% down. It is an extra charge you pay each month to protect the lender if you are unable to pay.
• Mortgage Insurance Premium (MIP): An additional charge you pay on FHA loans if you put down less than 10%. Like PMI, it is there to protect the lender.

If you are paying MIP or PMI, it is important to note that your loved ones are still on the hook for paying off the mortgage if you die.

Guaranteed Issued Insurance Vs. Fully Underwritten

When you purchase a life insurance product, you traditionally go through full underwriting. This entails seeing a medical professional, getting measurements taken, giving a blood sample, and answering a health questionnaire. Insurance company employee underwriters then review your case and give you a health rating. The ratings are based on formulas developed by the insurer based on historical experience and doctor’s input.

When you go through the full medical underwriting process, the insurance company can be more certain of your risk of death. Each rating class has a mortality table based on actuarial experience studies.

Guaranteed issue products don’t do any underwriting other than maybe making sure you aren’t actively dying while applying. Since the insurance company has no information about your underlying health, they charge a higher price. They don’t know if you are very unhealthy and likely to die in a few years or extremely healthy.

MPI is usually guaranteed issue which adds to the cost of the product.

Pros & Cons of Mortgage Protection Insurance

It is generally recommended that if you are healthy, you purchase a fully-underwritten life insurance product. However, if you are very unhealthy or have been declined for coverage in the past, you may opt for the guaranteed issue MPI. In general there are many pros and cons to mortgage protection insurance.

Benefits of MPI

Your home is the largest purchase you are likely to make. MPI protects your loved ones from this large debt if you are unable to help pay off the loan. The pros of MPI are:

• Peace of Mind: MPI lets you have peace of mind that your loved ones can stay in the home without your income.
• Disability/Unemployment Protection: Additionally, with a policy that helps cover mortgage payments if you face disability or job loss, you have the stability of being able to stay in your home.
• Guaranteed Acceptance: Since most MPI policies are guaranteed issue, you likely won’t be denied. If you are unhealthy or don’t want to go through the underwriting process, this allows you to get coverage. Also, if you have previously been denied coverage, MPI is a good way to get some life insurance.
• Coverage That Matches Your Mortgage: Since MPI decreases with your mortgage balance, it will be less expensive than a similar level death benefit guaranteed issue product.
• Easy: Between guaranteed issue and a check that goes right to your lender, MPI is a low hassle way to cover your mortgage

Downside of MPI

However, there are downsides to mortgage protection insurance. And since MPI is optional, there are reasons to avoid it for conventional life insurance.

• Extra Expense: MPI adds an additional cost to an already expensive mortgage.
• Guaranteed Issue Increases Costs: Assuming you are healthy, getting underwritten will typically be less expensive. Insurance companies assume that people who apply for guaranteed issue products are generally unhealthy and likely to live shorter.
• Lack of Flexibility: In many cases, MPI is not a good fit for your plans. For example, if you plan to pay off your mortgage early or if you have a small mortgage due to rolling equity from a previous home, MPI won’t be a good fit.
• No Extension Options: Since the product is for a specific use, it typically doesn’t offer extension options like post-level term or term conversion riders.
• Paid Directly to Lender: MPI is typically paid directly to your lender. This doesn’t give your beneficiary the ability to decide how to best use the money. This is both a pro and con.
• Restrictive Age Limits: MPI is often more restrictive on the ages it will issue to. If you purchase a home later in life, you may not qualify for MPI.

If you are a non-smoker in relatively good health, a fully underwritten level pay product will generally be cheaper. And it comes with the added benefit of giving your beneficiary the ability to allocate how they want. Additionally, as you pay down your mortgage, there is more excess death benefit on a level loan that they can use for other expenses.

How And Where To Purchase Mortgage Protection Insurance

Mortgage protection insurance is not as widely available as other insurance types. It may require searching on your end to find an insurance company to use. There are some aggressive companies that will mail you offers, but they may not be the best option for you.

If you decide to purchase MPI, make sure to compare options for both the company you use and MPI vs a conventional term product. You may find that the price makes purchasing a level death benefit product from a large insurance company is better.

Lastly, your lender will often offer MPI at closing or through solicitation. Again, you should comparison shop as you may find better pricing elsewhere.

What is the Cost of MPI?

The cost of a mortgage protection policy will depend on:

• Your age
• The years left on your mortgage
• The balance of your mortgage, and
• The type of coverage (ie – does it include disability riders)

The Veteran’s Affairs site has a Mortgage Life Insurance Calculator that can give you an idea of the cost for your specific needs.

The Final Word – Mortgage Protection Insurance

Mortgage protection insurance is a niche product for a specific use case. It can be a useful way to get coverage if you are very unhealthy or have been denied coverage before. MPI can occasionally be used to better match your insurance needs to your coverage as well. But in general, guaranteed issue policies tend to be more costly. And since MPI comes with lots of restrictions and flexibility, it tends to not be optimal for most people.

However, all insurance decisions are unique to your situation and personal financial plan, and MPI may work for you.

Frequently Asked Questions (FAQs)