The Cost Of Mortgage Life Insurance: Is It Worth It?

Mortgage protection insurance, also known as MPI, is a type of life insurance policy that pays off the remaining balance on your mortgage if you pass away before paying it off. The cost of this insurance varies depending on factors such as the size of your home loan, the length of your mortgage term, your age, and your life circumstances. According to Nolo.com, premiums for mortgage protection insurance typically range from $20 to $100 per month, but can be as low as $5 per month or as high as $100 per month. This type of insurance offers peace of mind by ensuring that your family can keep the house, but it may not be the best option for everyone due to its limited flexibility and potentially high cost.

Mortgage protection insurance vs. life insurance

Mortgage protection insurance and life insurance are both optional policies that provide financial protection to loved ones in the event of the policyholder's death. However, they differ in terms of eligibility, cost, benefit amount, and payout structure. Here are the key differences between the two:

Eligibility Criteria

Mortgage protection insurance involves minimal to no underwriting, and most plans offer guaranteed acceptance regardless of health or occupation. In contrast, life insurance premiums are often based on factors such as age, health, and occupation, and many companies require a physical exam for qualification.

Cost

The monthly premium for mortgage protection insurance typically ranges from $5 to $100 per month, while life insurance premiums vary widely depending on the provider, policy, and individual covered. Life insurance premiums tend to be higher than mortgage protection insurance, especially for those with health issues or high-risk occupations.

Benefit Amount

With mortgage protection insurance, the benefit amount decreases over time as the policyholder pays down their mortgage. The coverage ends once the loan is fully repaid, and there is no payout if the policyholder passes away after that point. On the other hand, traditional life insurance death benefits usually retain their value as long as the policy is active.

Payout

The payout for mortgage protection insurance goes directly towards paying off the policyholder's mortgage balance. In contrast, life insurance provides a death benefit to beneficiaries, who can choose to use the money for any purpose, including paying off the mortgage or covering other expenses.

Suitability

If you have adequate life insurance coverage, mortgage protection insurance may not be necessary. However, if you cannot qualify for life insurance or need additional coverage, mortgage protection insurance can be a more accessible and affordable option. It is particularly suitable for older individuals, those with health issues, or those with dangerous professions who may struggle to obtain affordable life insurance.

Pros and Cons of Mortgage Protection Insurance

Mortgage protection insurance offers several benefits, including no medical exam requirement, the ability to add riders for customised coverage, and peace of mind that your loved ones will not be burdened with mortgage payments. However, there are also drawbacks, such as the decreasing payout over time, the inability of beneficiaries to use the death benefit for other expenses, and the potential for higher costs compared to the level of coverage provided.

Mortgage protection insurance and life insurance serve similar purposes but differ in their specifics. Mortgage protection insurance is designed specifically to cover the remaining balance on a mortgage in the event of the policyholder's death, while life insurance provides a more flexible death benefit that can be used by beneficiaries for any purpose. The best option for individuals depends on their unique circumstances, health, budget, and financial goals.

Pros and cons of mortgage life insurance

Pros of Mortgage Life Insurance

• No medical exam: Mortgage life insurance policies generally don't require a medical exam and, in some cases, may not even ask health questions. This can make this policy more accessible to homeowners who don't like to take medical exams for life insurance or want to get coverage more quickly.
• You can add riders: Riders are add-on coverages with which you can customize your mortgage life insurance policy. For example, a waiver of premium rider can help cover your premiums if you become disabled and unable to work during the policy term.
• Peace of mind for your family: An MPI policy means your mortgage payments are covered if you pass away or become disabled. This ensures that your family won't be responsible for paying off your mortgage or losing the house due to foreclosure.
• Guaranteed policy acceptance: Guaranteed acceptance means you can’t be denied an MPI policy based on your health condition. This can benefit homeowners who are having a difficult time getting a life insurance policy or would typically have to pay higher rates.
• Underwriting not required: MPI plans often don't require underwriting because most policies don't need you to submit a medical exam to qualify for mortgage life insurance coverage.

Cons of Mortgage Life Insurance

• Beneficiaries can’t use the death benefit for any other expenses: The insurer pays the life insurance death benefit directly to the mortgage lender. Since beneficiaries don’t receive the proceeds, they can’t use it to help pay other debts or expenses.
• Decreasing payout: Since these policies are designed only to pay off a mortgage, your death benefit decreases as you pay down your mortgage. Plus, you must continue paying the same premiums for this decrease in coverage. Eventually, your policy ends if you pay off the mortgage before passing away, and you won't receive a death benefit for the premiums paid.
• Can be expensive: Mortgage life insurance can be expensive for the level of coverage you can receive since there’s no medical exam. Additionally, your cost per dollar of coverage increases with time since premiums are level while the death benefit decreases.
• Lacks the cash value growth component of permanent life insurance: Therefore, you can’t use it as an additional wealth-building vehicle while the policy is active.
• Extra monthly payment: With an MPI plan, you’ll be responsible for making an extra payment every month. You might want to make sure MPI fits into your budget before purchasing coverage.
• Limited payout options: If you pass away, the MPI payout only goes toward your mortgage debt. Mortgage life insurance won’t provide your family with money to cover taxes, bills or funeral costs.

Mortgage protection insurance vs. term life insurance

Mortgage protection insurance, also called MPI, mortgage protection life insurance, or mortgage life insurance, is a type of life insurance policy specifically for homeowners. With mortgage protection insurance, your mortgage lender is listed as your beneficiary. If you die before paying off your mortgage, your policy will pay off your remaining balance with a direct payment to the lender.

Mortgage protection insurance specifically pays off your mortgage debt in the event you pass away before the balance is paid in full. Some policies cover your mortgage in other instances besides death, such as becoming disabled or unemployed. The policy remains in effect for the life of your mortgage (30 years, for example).

Term life insurance is a type of policy you can buy through an insurance company. You decide how long you want your policy to last (typically 10, 20 or 30 years) and how much coverage you need. People usually choose their coverage amount based on their current and future financial obligations.

Differences between mortgage protection insurance and term life insurance

Eligibility criteria

Unlike term or whole/permanent life insurance, mortgage protection insurance involves minimal to no underwriting. Most MPI plans have guaranteed acceptance, meaning your premium won’t depend on factors like your occupation or health.

On the contrary, life insurance premiums can be based on factors like your age, health, and occupation. Many life insurance companies require you to undergo a physical exam, and certain medical conditions can mean the insurer might deny you coverage.

Cost

The monthly premium for an MPI policy can range from as little as $5 per month to $100 per month. By comparison, life insurance premiums vary widely based on the provider, policy, and individual covered.

Benefit amount

With most MPI policies, the benefit shrinks as you pay down your mortgage and the coverage ends once you pay off the loan. In contrast, most traditional life insurance death benefits retain their value as long as the policy is active.

Payout

With life insurance, your beneficiaries receive a death benefit that can be used to pay the policyholder’s mortgage balance or for any other purpose. The payout for mortgage protection insurance goes directly toward paying off the policyholder’s mortgage.

Who should choose mortgage protection insurance or term life insurance?

If you have an adequate life insurance policy, you likely won’t need mortgage protection insurance. Your beneficiaries can simply use the life insurance payout to pay off your mortgage if needed.

However, if you don’t qualify for life insurance or enough coverage, a mortgage protection plan might make sense for your loved ones. You won’t need to undergo a medical exam or provide other health information to buy this type of policy, and the premiums are often very inexpensive.

When does it make sense to buy MPI?

Mortgage Protection Insurance (MPI) is a type of life insurance that pays off the remaining balance on your mortgage when you die. It is designed to give peace of mind to homeowners, ensuring that their families can keep the house. MPI is often sold by mortgage lenders and banks, and it is not the same as private mortgage insurance (PMI) or mortgage insurance premium (MIP).

MPI makes sense in the following scenarios:

• You have health conditions or a risky occupation: If your health or job makes term life insurance too expensive, MPI might be a more affordable option. MPI does not require a medical exam or medical underwriting, so your health will not impact the cost of your policy.
• You are an older adult: Term life insurance gets more expensive as people age, so MPI may be cheaper for older adults.
• Your only concern is paying off your mortgage: If your main priority is ensuring your mortgage is covered if you die, MPI could be a good fit.
• You have been denied term life insurance: If you are unable to qualify for term life insurance due to health or other reasons, MPI can be a way to ensure your mortgage is protected.

However, it is important to consider the drawbacks of MPI. The payout decreases over time as you pay off your mortgage, while the premiums typically remain the same. Additionally, MPI lacks the flexibility of term life insurance, as the payout goes directly to the lender, not your beneficiaries. MPI can also be more expensive than term life insurance, especially for those with good health.

Mortgage protection insurance: is it worth it?

Mortgage protection insurance, or MPI, is a type of life insurance policy that pays off your mortgage when you die. It's designed to give you peace of mind, ensuring your family can keep the house if you pass away with an outstanding balance.

But is it worth it? In this article, we'll weigh up the pros and cons of MPI to help you decide if it's the right choice for you.

MPI is a voluntary policy that you can purchase to protect your family from the financial burden of an unpaid mortgage in the event of your death. It's important to note that MPI is different from private mortgage insurance (PMI), which is required for homebuyers who make a down payment of less than 20% on a conventional loan.

With MPI, your mortgage lender is listed as your beneficiary. If you die before paying off your mortgage, the policy will pay off the remaining balance directly to the lender. Some MPI policies also offer temporary payment protection if you lose your job or become disabled during the term.

The cost of MPI varies depending on factors such as the size of your home loan, the length of your mortgage term, your age, and your life circumstances. Premiums typically range from $20 to $100 per month and tend to be higher than comparable traditional life insurance policies.

Pros of mortgage protection insurance

• No medical exam: MPI policies generally don't require a medical exam, making them more accessible to homeowners who don't want to undergo an exam or have health issues that could affect their eligibility for regular life insurance.
• Convenience: MPI policies align with your loan balance and pay the lender directly, making it easier for your loved ones to manage the payout.
• Riders: You can add riders, or add-on coverages, to customise your MPI policy. For example, a waiver of premium rider can cover your premiums if you become disabled and unable to work.

Cons of mortgage protection insurance

• Lack of flexibility: The payout from MPI goes directly to the lender, so your beneficiaries won't have the freedom to use the money as they wish.
• Decreasing payout: While your premiums remain the same, the payout decreases over time as you pay down your mortgage.
• Higher premiums: MPI premiums are often higher than those of term life insurance policies, especially for homeowners who could easily qualify for traditional life insurance.

Alternatives to consider

When deciding if MPI is worth it, it's essential to compare it with other options, such as term life insurance. Term life insurance offers more flexibility, as it allows your beneficiaries to use the payout for any purpose, including paying off the mortgage. It also provides a consistent death benefit and typically offers lower premiums.

Who is MPI a good fit for?

MPI can be a good fit for older homeowners or those with pre-existing health conditions or high-risk jobs, as they may face higher premiums or have difficulty qualifying for traditional life insurance. If your main concern is ensuring your mortgage is paid off, MPI could provide peace of mind.

However, if you're looking for more flexibility and lower costs, term life insurance may be a better option. It allows your beneficiaries to balance mortgage payoff with other financial responsibilities.

Frequently asked questions