Finding Life Insurance: Mortgage Payoff Notices Explained

Life insurance is often taken out to cover an outstanding mortgage balance, ensuring that the mortgage is paid off in the event of the policyholder's death. This is known as mortgage life insurance or mortgage protection insurance. It is typically offered by the mortgage lender or one of their partner companies, but it can also be purchased from unaffiliated insurers. The beneficiary of an MPI policy is usually the mortgage company, not the family of the deceased. As such, the death benefit is paid directly to the lender, and any coverage amount that is higher than the outstanding mortgage balance will not be paid out to the family. MPI policies are generally more expensive than term life insurance policies, and they may not be necessary if the policyholder is in good health and has access to cheaper alternatives.

Mortgage protection insurance (MPI)

MPI policies generally work like conventional life insurance policies. Each month, you pay your mortgage protection insurer a premium to maintain coverage and ensure your coverage stays current. In exchange for your premium payments, your insurance company will pay a death benefit to your lender. The benefit can cover your remaining mortgage payments, protecting your loved ones from financial stress.

Unlike traditional life insurance policies, you can’t specify beneficiaries, and your death benefit may decrease over the life of the mortgage. The money from an MPI policy goes directly to your lender, not your loved ones or family members. The funds are used to cover the mortgage and can’t be used for anything else.

Pros and Cons

Pros

• Guaranteed policy acceptance: MPI policies offer guaranteed acceptance, meaning you can’t be denied an MPI policy based on your health condition.
• No underwriting required: MPI plans don't require underwriting because most policies don't need you to submit a medical exam to qualify for mortgage life insurance coverage.
• 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.

Cons

• Extra monthly payment: With an MPI plan, you’ll be responsible for making an extra payment every month.
• 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.
• Alternative policies may work better: If you want an insurance policy that provides more of a financial safety net for your family members, you might consider a traditional life insurance policy over MPI.

Where to Buy MPI

You can buy an MPI policy through your mortgage lender, a private insurance company, or a life insurance provider. It's recommended to shop around and compare rates, terms, and conditions before purchasing an MPI policy.

Cost of MPI

The cost of an MPI policy depends on various factors, including the remaining balance on your mortgage loan, the remaining loan term, your age, and the amount of coverage you want. For example, a 50-year-old homeowner with $150,000 remaining on their mortgage and 12 years left to pay off the loan can expect to pay about $28.77 a month for an MPI policy that covers the remaining loan balance.

Term life insurance

When considering term life insurance to cover your mortgage, it is important to keep in mind that the payout may not be sufficient to pay off the entire mortgage if you pass away early in the term. In such cases, your loved ones may need to continue making mortgage payments or explore other options, such as selling the home.

Additionally, it is worth noting that term life insurance is just one option for protecting your mortgage. Whole life insurance, for example, offers long-term coverage and can also be used to pay off a mortgage. Consulting with a financial professional can help you determine the best approach for your specific situation.

Mortgage life insurance

Pros of Mortgage Life Insurance

Cons of Mortgage Life Insurance

Alternatives to Mortgage Life Insurance

Term life insurance and whole life insurance are two alternatives to mortgage life insurance. Term life insurance provides a level benefit and premium for the term of the policy, and beneficiaries can use the payout for anything, not just paying off the mortgage. Whole life insurance lasts for the policyholder's lifetime and has a wealth-building component, allowing the policyholder to borrow against or withdraw from the cash value.

Private mortgage insurance (PMI)

PMI is arranged by the lender and provided by private insurance companies. It is an extra expense for conventional mortgage borrowers, who put less than 20% down on a home. Although the borrower pays for it, PMI compensates the lender in case of default on payments.

The four main types of PMI are:

• Borrower-paid mortgage insurance
• Single-premium mortgage insurance
• Lender-paid mortgage insurance
• Split-premium mortgage insurance

The cost of PMI typically ranges from 0.5% to 2% of the loan balance per year but can be as high as 6%. The cost depends on several factors, including the borrower's credit score, the size of the down payment, the loan type, and the loan term.

Borrowers can request the elimination of PMI once they have accumulated 20% equity in their home. Lenders are required to cancel PMI when the mortgage balance drops to 78% of the home's original value or when the borrower reaches the midpoint of their loan term.

Mortgage unemployment insurance

Pros and Cons

Pros:

• Peace of mind: Mortgage unemployment insurance provides peace of mind and helps you remain in your home in the event of a job loss.
• Protect your credit score: It can protect your credit score by ensuring that you make timely mortgage payments during a period of unemployment.
• Reduces the risk of foreclosure: It reduces the risk of foreclosure during an extended period of unemployment.

Cons:

• Cost: Mortgage unemployment insurance can be expensive, especially when compared to other types of insurance.
• Limited coverage: The coverage provided by mortgage unemployment insurance is limited to your mortgage payments and does not cover other expenses or debts.
• Waiting period: There is usually a waiting period of 30 to 90 days before the benefits kick in, which means you may have to find other ways to cover your mortgage payments during this time.

Alternatives to Mortgage Unemployment Insurance

If you are concerned about making your mortgage payments in the event of a job loss, there are a few alternatives to mortgage unemployment insurance:

• Supplemental unemployment insurance: This type of insurance is designed to supplement state/federal unemployment benefits and can provide additional financial support during a period of unemployment.
• State/Federal unemployment benefits: Government unemployment benefits can provide partial income replacement if you lose your job involuntarily.
• Develop an emergency fund: Building an emergency fund can help cover your mortgage payments in the event of a job loss.

While mortgage unemployment insurance can provide peace of mind and protect your home during a period of unemployment, it is important to weigh the pros and cons carefully before purchasing this type of insurance. It is also essential to consider alternative options and consult with a financial professional to determine the best course of action for your specific situation.

Frequently asked questions