Mortgage Protection Insurance Basics
September 2, 2010
When we first bought our home we received a ton of advertisements for mortgage protection insurance in our mailbox within the first week. They kept on coming at least one or two letters per week offering mortgage protection insurance, mortgage protection plans, and mortgage cancellation insurance for the first six months of owning our home. It was insane.
I had never heard of mortgage protection insurance so I figured other potential home buyers would be interested in discovering what it’s all about before all those letters start hitting your mailbox.
Private Mortgage Insurance vs Mortgage Protection Insurance
Many of you are probably familiar with private mortgage insurance or PMI. Although the names are similar PMI is completely different than mortgage protection insurance.
Private mortgage insurance is almost always required by banks when you buy a house with less than 20% down payment. (Your only other option is a second mortgage at a higher rate than the first mortgage). PMI protects the bank’s investment, if you default on the mortgage loan the insurance kicks in and pays the bank what you owe them. PMI is basically a premium you pay for having a small down payment and it helps insure the bank’s money.
Mortgage protection insurance is an extra level of insurance you can buy whose purpose is to protect against unforseen life events (becoming disabled, losing your job, or death) that make it difficult or impossible for you to make your mortgage payments.
Mortgage Protection Insurance Coverage
MPI will pay your mortgage for you if your circumstances meet the criteria of your policy. Many policies have a limit on the amount the policy pays or length of time it will pay for you. (Some limit both.)
So when does it kick in? As I mention it depends on the policy but in general, if you:
- become disabled and unable to work
- lose your job and lack income to make mortgage payments
- die (these policies usually pay off the loan)
Mortgage Protection Insurance Alternatives
Let’s address each of the above issues.
Disability – One option is to buy a disability insurance policy. With this policy you’ll get a monthly check to replace your lost income. That’s income that you can use for anything — not just your mortgage like with MPI.
Unemployment – One common suggestion to guard your finances against losing your job is to build an emergency fund. An emergency fund can be used to fight not only unexpected unemployment but also any big financial issues like a car dying or unplanned medial bills.
Death – A term life insurance policy would be a good alternative to mortgage proection insurance. The benefit of life insurance is that your family can use the money as they see fit, they wouldn’t have to use it to pay off the house like mortgage protection insurance would do.
Where to Buy Mortgage Protection Insurance
Let’s start with two places to not buy mortgage protection insurance. You should not buy a policy from your bank or anyone your bank recommends simply because it is your bank. I’m not saying you shouldn’t consider these policies, just be sure to watch out for conflicts of interest.
Along the same lines, I would be wary about buying mortgage protection insurance based only on a direct mail advertisement. Not that you should rule a company out simply because they sent you an ad in the mail but make sure you research the company and the policy they offer. For example, The Hartford is a reputable insurance company and they sent me information about the product but I wouldn’t automatically use them simply because of their reputation. I would find out the terms and details of their policy before signing anything or paying any money.
If you’re considering mortgage protection insurance the best thing to do is probably consult with an insurance agent that specializes in the product. An alternative to an in-person meeting with an agent would be to do a lot of research of companies online. (But I wouldn’t buy this type of insurance online unless I was very, very sure of the company and website I was purchasing from.)
Comparing Mortgage Protection Plans
As with any insurance product there are a lot of factors to consider before you make a purchase decision. Here’s a quick run down.
- Cost/Benefit Ratio – How much is the policy going to charge on a monthly basis?
- Policy Cancellations – Are there a lot of “catches”? Do you have to pay a fee to get out of the policy?
- Health Factors – Do health risks increase the chances you might need need this insurance?
- High-Risk Occupations – Do you work in industries that are more likely to lead to death or disability (loggers, oil rig work, etc.)?
- Financial Situation – Can you afford the insurance and have you run the numbers on the alternatives?
The last factor to consider is the actual insurance you are purchasing. You pay a flat fee for a slowly less valuable payoff. If you use the insurance one year into owning your home then the insurance company will be paying you the full amount of the insurance.
The flip side is if you use the insurance with one year left to pay off your mortgage your benefit will be significantly reduced.
Is MPI for you? I prefer having insurance products and savings that cover me in a multitude of financial situations, but some people may find value in mortgage protection insurance.
All posts by Kevin
Having a good life insurance policy in place to protect
your property in the event of your death is vital. When you
die, your family will have enough to worry about without
the added stress of how they are going to hold on to the
family home. Your life insurance policy will ensure that
this problem is eliminated, with the mortgage balance being
paid in full upon your death.
The idea behind mortgage protection insurance is straightforward: You pay a premium, which remains the same for the duration of the policy. If you die during that time, the insurance pays out your death benefit.