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Mortgage Protection Insurance: What It Is and How It Works
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You’ve just bought a home, and your mailbox is likely littered with letters offering you mortgage protection insurance. This coverage provides a benefit to your mortgage lender by paying off your home loan if you die.
It sounds like a worthwhile investment, but is it really necessary? And is it any different from standard life insurance? Keep reading for the rundown.
- What is mortgage protection insurance?
- What mortgage protection insurance does and doesn’t cover
- Understanding MPI vs. PMI
- Does standard life insurance cover your mortgage?
What is mortgage protection insurance?
Mortgage protection insurance, also called mortgage life insurance, is an insurance policy that pays your remaining mortgage balance if you unexpectedly pass away. Your mortgage lender may offer this product, but unaffiliated third-party companies sell it and will typically contact you in the months after you’ve taken out a mortgage to buy your home.
However, the only beneficiary on a mortgage protection life insurance policy is your mortgage lender; your loved ones won’t directly benefit from the coverage.
What mortgage protection insurance does and doesn’t cover
Below, we highlight what a typical mortgage protection insurance policy does (and doesn’t) cover, so you understand what you’re signing up for.
What it covers
- Death. In the event of your death, the policy pays off your mortgage balance. Some policies may only cover an accidental death rather than natural causes, so be sure to read the fine print carefully.
- Dependents. Your children or other young dependents may receive some sort of basic protection in addition to the standard coverage.
- Disability/Illness. If you become critically ill or are injured and not able to work, the policy may cover your monthly mortgage payments.
- Unemployment. Similar to the disability and illness coverage, your mortgage payments may be covered if you suffer a job loss.
Your policy may also have a feature that decreases your coverage amount over time, similar to how your loan balance goes down over your loan term. Another option allows the coverage amount to stay the same over the life of the policy, even while you pay down your mortgage.
Your policy may offer the option to refund your mortgage protection premiums if the coverage isn’t used by the time you pay off the loan.
What it doesn’t cover
- Funeral costs. There’s no coverage provided for your funeral arrangements.
- Non-mortgage debt. The policy won’t pay off any debt outside of your mortgage balance.
- Living expenses for beneficiaries. Standard life insurance policies may help cover ongoing living expenses for your beneficiaries, but mortgage protection insurance typically doesn’t.
Understanding MPI vs. PMI
Mortgage protection insurance shouldn’t be confused with mortgage insurance, which protects your lender if you default on your mortgage payments.
If you have a conventional loan and put down less than 20% at closing, then you’re required to pay for private mortgage insurance (PMI). And if you take out an FHA loan, you’ll pay mortgage insurance premiums no matter your down payment amount.
Conventional borrowers can get rid of PMI after they’ve reached 20% equity in their homes. FHA borrowers can only get rid of MIP if they’ve made at least a 10% down payment and have been making payments for 11 years. Otherwise, the insurance is in place for the life of the loan or until they refinance into a conventional loan after building 20% equity.
Does standard life insurance cover your mortgage?
Another insurance coverage type that can pay off your mortgage if you die is a standard life insurance policy. There are two main types: term and permanent.
A term policy is in place for a set number of years, such as 10, 20 or 30 years, and pays your beneficiaries if you were to pass away during that term. A permanent policy provides coverage for your entire life span and pays out when you pass away.
Instead of paying your mortgage lender directly, standard life insurance policies go to the beneficiaries you select, who can then choose to pay off the mortgage.
Here’s how mortgage protection insurance measures up against standard life insurance.
|Mortgage Protection Insurance||Standard Life Insurance|
|Cost||A healthy 40-year-old man could get a 20-year policy for nearly $800 annually.||The same 40-year-old man could get a 20-year term life insurance policy for less than $500 a year.|
|Benefit||The death benefit is limited to your outstanding mortgage balance amount.||The death benefit is a specific dollar amount, such as $500,000 or $1 million.|
|Who gets the benefit?||Your mortgage lender is the beneficiary.||You can choose your own beneficiaries.|
|What gets paid?||The death benefit pays your outstanding mortgage balance.||The death benefit typically covers your final expenses, including funeral costs, and may replace your income for your beneficiaries.|