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Signing onto a 30-year home loan is a major financial commitment for many homeowners. If you or your spouse dies or becomes disabled, your family could fall behind on payments and eventually be forced into foreclosure.
But there are safeguards you can put into place. One option is mortgage protection insurance (MPI), which pays off the mortgage under certain circumstances.
While this type of insurance can provide a safety net for your family, you should weigh the pros and cons carefully before signing up for a policy.
Here’s what you need to know about mortgage protection insurance:
- What is mortgage protection insurance?
- An alternative to mortgage protection insurance
- Is mortgage protection insurance right for you?
- Where to get mortgage protection insurance
What is mortgage protection insurance?
Mortgage protection insurance is an optional type of insurance that’s designed to pay off a home loan if a homeowner dies before the balance is paid in full.
In some cases, the policy might cover mortgage payments if you or your partner becomes disabled or loses a job.
These policies, also known as mortgage life insurance or mortgage payment insurance, are usually sold by insurance companies and mortgage lenders.
MPI providers might set strict guidelines on when you can apply: Some want you to obtain it within 24 months of closing on your home loan, but others might extend it to five years. But it’s always a good idea to check with your provider on their requirements.
That time frame — along with your premium, limitations of the policy, and the payout — vary with every company and policy, however.
Learn More: What Happens to Your Mortgage When You Die?
MPI vs. PMI
Mortgage protection insurance is different from private mortgage insurance (PMI). PMI is designed to protect the lender if you default on your loan payments, meaning your family would still owe the balance of the loan after a death or disability.
MPI vs. MIP
MPI can also be confused with a mortgage insurance premium (MIP). MIP functions the same as PMI in that it protects your lender if you default — so if you die before paying off the mortgage, your family will still be on the hook for making payments.
An alternative to mortgage protection insurance
If you’re looking for some form of mortgage payment protection, you might want to also look into life insurance and compare your options.
Life insurance pays a lump sum of money to your beneficiaries when you die. There are two major forms of life insurance:
- Term life insurance: Provides a payout if death occurs during the term of the policy
- Whole life insurance: Pays out whenever you die
With both types of life insurance policies, your family can spend the payout money however they’d like, such as on funeral costs and routine monthly expenses. With MPI, however, the payout goes directly to the lender, providing less flexibility.
MPI is generally a guaranteed acceptance policy, which means you don’t have to get a health exam to determine whether you qualify — although your MPI provider can deny you coverage based on your age. That’s why homeowners with health problems or high-risk jobs might choose MPI over life insurance.
Is mortgage protection insurance right for you?
Because mortgage protection insurance policies decrease in value over time and can be hard to get later in life, they’re generally best for homebuyers who:
- Are young and might have trouble securing term life insurance
- Work in high-risk jobs
- Have existing health conditions
If your family would use the payout for more than just the mortgage — such as monthly bills, funeral costs, and college tuition — then a regular life insurance policy might be a better fit.
The pros of MPI
Homebuyers typically choose MPI to save their loved ones from financial hardship, but they also offer other benefits:
- It’s easier to qualify for MPI. If you have health problems or a dangerous job, it might be easier to purchase MPI because there’s no medical exam.
- Your family doesn’t have to worry about the payout. An MPI payout goes directly to your lender for the mortgage balance, which means your family won’t have to worry about the home loan.
- You might get disability protection. Some MPI policies cover homeowners who become disabled, which provides some flexibility.
The cons of MPI
MPI isn’t for everyone. Here are some of the cons that come with this type of insurance policy:
- You have a narrow window to opt in. Depending on the provider, you might have to apply shortly after closing on the home.
- MPI policies are expensive. In many cases, MPI costs more than term life insurance. Healthy young adults could save money by buying life insurance instead.
- Policies are not very flexible. MPI goes directly to the lender to pay off the mortgage — and nothing else. Your family won’t have the option of using the money for funeral costs or other pressing bills.
- Coverage shrinks over time. As your mortgage balance declines, so does the value of an MPI policy. So you’ll pay the same cost for less coverage over time.
- It has more restrictive age limits. Some MPI providers restrict eligibility based on age.
Regardless of whether you choose to buy an MPI policy, it’s always a good idea to seek an affordable mortgage with the best possible rates.
Credible can help you compare mortgage options to make sure you get one that fits within your budget.
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Where to get mortgage protection insurance
If you’re interested in MPI, gather quotes from multiple providers to compare terms and make sure you’re getting the best deal. Also make sure you understand what the policy does and doesn’t cover.
Here’s where you’re likely to find an MPI policy:
- Your mortgage lender: After closing on your loan, your mortgage lender might offer you an MPI policy. If your lender doesn’t offer this type of policy, you can also ask for a referral to a company that does.
- An insurance company: Some insurance companies specialize in mortgage protection policies, but providers may not be available in every state.
- A life insurance provider: Many companies that offer life insurance also carry MPI. You might even score a discount if you bundle MPI with life insurance.
If you’re considering a home purchase, be sure to shop around. Credible makes this easy — you can compare multiple lenders in as little as three minutes using the table below.
