What is mortgage protection insurance — and do you need it?

What is mortgage protection insurance?

Mortgage protection insurance (MPI) is a type of insurance policy that guarantees if you die, then your mortgage will be paid off — partially or in full. These policies are offered by banks and mortgage lenders, and they do not replace term life insurance, which is a superior product in many ways.

That said, there are certain circumstances where they can be essential in protecting your family.

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How does MPI work?

Mortgage protection insurance is usually taken out for the same length as your mortgage term. In the event of your death, the insurance pays off the remainder of your loan.

As your mortgage balance decreases, so does your possible insurance payout, even though your monthly premiums stay the same. To make matters worse, the money bypasses your family and goes directly to your lender.

If your family needs the money for more pressing matters, they’re out of luck.

It’s also worth noting that depending on your age, you may be limited to a shorter term. That’s because the older you are, the more likely the insurance will have to make a payout.

Do you need mortgage protection insurance?

Mortgage protection insurance is not mandatory. It is often confused with private mortgage insurance, or PMI, which in some cases is mandatory.

If your down payment is less than 20% your lender may require you to take out PMI, which offers the lender protection if you default on your loan.

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How much does a policy cost?

Compared to regular term life insurance, mortgage protection insurance isn’t cheap. When you buy mortgage protection insurance, your premium will vary based on the cost of your mortgage and how much of that you want to cover.

A mortgage protection insurance policy could cover:

• Your entire mortgage balance;
• A portion of the mortgage balance;
• Or, mortgage payments for a certain length of time.

The more comprehensive the policy, the higher the premiums.

The price you pay also will depend on any riders you choose to add. For example, you can add in a disability rider which will help cover your bills if you come down with a career-ending health condition.

You might find that disability insurance is a better and more cost-effective choice.

When mortgage protection insurance makes sense

Mortgage protection insurance can be purchased through banks, mortgage lenders, private insurance companies and life insurers. If you decide a policy is right for you, you need to act quickly once you buy a home.

After taking out your mortgage, there's normally only a short period when you're eligible to buy mortgage protection insurance. If you miss your window of opportunity, you can always purchase a regular life insurance policy (which your most likely better off doing anyway).

More: 10 best life insurance companies

Bottom line: Is MPI worth it?

Compared to term life insurance, mortgage protection insurance isn’t a very attractive option:

• It’s usually more expensive.
• Payouts decrease over time.
• You have only a short window to buy it.
• Payouts go to your lender instead of to your family.

That said, mortgage protection insurance does offer one advantage. Unlike other types of life insurance, you normally will not be required to pass a medical exam to buy a policy.

This means that if you have health conditions that prevent you from purchasing term life insurance, mortgage insurance is a great last resort.

What is the best mortgage protection insurance?

The best mortgage protection insurance is the one that provides adequate coverage for your family, while still fitting your budget.

It’s all about finding that balance. It’s reassuring to know that your entire mortgage will be covered. But if full coverage isn't affordable for you, look for companies that offer partial coverage.

Better yet, if you meet the requirements, take out a term insurance policy that's more flexible and costs less — and skip mortgage life insurance.

Frequently asked questions about MPI

What is mortgage decreasing term insurance?

Mortgage decreasing term insurance is not a real type of insurance. But there is decreasing term life insurance, which is term life insurance with a death benefit that decreases over time. Those plans are not specifically for mortgages.

Will my lender require mortgage protection insurance?

A lender won't insist that you buy mortgage protection insurance. It's often confused with PMI, which may be mandatory for homebuyers who make down payments of under 20%.

Do I need life insurance for a mortgage?

You're not required to have life insurance to take out a mortgage. However, by purchasing life insurance, you can ensure that your mortgage is covered in the case of your premature death.

Does mortgage insurance cover illness?

Mortgage insurance covers your mortgage for your family if you die. Normally, it does not cover illness unless you purchase a disability rider, which will help cover your bills if you become disabled and can no longer work.