Mortgage protection life insurance–wait. what?
With so many different types of insurance you can purchase nowadays, it’s very easy to get insurance poor.Buying coverage on your home with mortgage life insurance teeters on the fence of being a bit too much.
Before I get ahead of myself, let’s look exactly what mortgage life insurance really is, then we’ll look to see if it’s worth buying. Finally, we’ll look at what other alternatives you can consider instead– such as buying a term life insurance policy.
What Mortgage Protection Life Insurance Is Not
First, I wanted to clarify what mortgage life insurance is not. Don’t get this confused with PMI (Private Mortgage Life Insurance). PMI is what is required by your bank or lender if you can’t make a down payment (typically 20%) when purchasing or building new home. I know in our case of the home we’re building, are bank is requiring the 20% to avoid the PMI insurance.
What is mortgage protection insurance?
Mortgage protection insurance, or MPI (sometimes called mortgage payment protection insurance), is simply a form of life insurance. The cost depends on factors such as the amount of your mortgage, your age and your health. For MPI policies that cover a mortgage in the event of disability, costs also vary depending on your occupation.
Shortly after you close on a mortgage – whether it’s because you just bought a home or refinanced your existing loan – you’ll probably start getting daily solicitations in the mail urging you to purchase mortgage protection life insurance. Don’t confuse this product with the private mortgage insurance or mortgage insurance premium you may need to pay for along with your mortgage if you put down less than 20% on your home. And do understand what you would be buying if you choose to sign up for mortgage protection life insurance.
These solicitations disguise themselves as official requests from your mortgage lender and give details about your mortgage, like your lender’s name, how much you borrowed, your loan type and, of course, your name and address. In stern, bold lettering, they lead with statements like these:
- “IMPORTANT NOTICE: PLEASE COMPLETE AND RETURN”
- “FINAL NOTICE: MORTGAGE PROTECTION CARD”
- “NOTICE OF OFFERING: MORTGAGE FREE HOME PROTECTION”
Then they get into the scare tactics and emotional pleas:
“What if you die suddenly? Would your family be able to continue paying the mortgage and maintain the same quality of life?”
The solution they offer is a program claiming to “protect your family in case of an unexpected tragedy by paying off your mortgage.” It’s called a mortgage protection program or mortgage protection life insurance. “Without this plan,” the solicitations say, “your family would still have to make your monthly mortgage payments.”
Choosing and saving on MPI
If you have health or job risks that make life or disability insurance unavailable or too expensive, mortgage protection insurance is probably a smart option. But don’t sign up through your mortgage company without shopping around.
“Ask about the price and features of each policy and whether it can be converted into whole life insurance,” says Ketch am. “Also investigate the insurer’s financial condition through A.M. Best Co., which rates insurers.”
If you’re considering MPI payable upon your death, you might buy a level life insurance instead. Your policy wouldn’t decline in value and would cover not only your mortgage but also your family’s living and educational expenses in the absence of your income.
“You’re far better off using a level product because most insurance carriers allow a later reduction in the policy’s face value,” Holman says. “If at, say, year seven in your policy, you decide your need isn’t $1 million but only $800,000, you can reduce the face amount and save through the reduced premium. You’re better off controlling the benefit than having it automatically reduced.”
What is a better solution?
We do agree that buying insurance that can be used to pay off your mortgage is important, but it needs to be purchased from an insurance company, not a lender. With a life insurance policy there are several benefits over a mortgage life insurance policy from a lender. To find out more about what the benefits are of having a personal life insurance policy that can be used against your mortgage, contact our life and financial services team.