Mortgage Protection Life Insurance 101

Borrowing, Home Purchase Loan, Insurance, Mortgage Refinance, Other Insurance

Mortgage Protection Life Insurance (MPI) is designed to cover your mortgage payments in case of a catastrophic life event. Policies can vary, but MPI generally covers your mortgage payments if you are disabled or lose your job, and will pay off the mortgage if you pass away.

Note: Because of the close acronyms, people sometimes confuse MPI with PMI (Private Mortgage Insurance), which is insurance that pays the bank in case of your default or foreclosure. They are completely unrelated.

Disability and job-loss MPI coverage is limited to a particular period of time (generally 1-2 years) and usually covers your monthly payments (both principal and interest components). Other home-related expenses such as taxes and homeowner association fees are not included.

The death benefit is fairly straightforward¬– in the event of your death, the insurance company pays off your mortgage in full, leaving your home to your heirs. Policy terms are typically for 15 or 30 years to match typical mortgage terms.

One mildly annoying aspect of MPI is that it typically provides declining benefits, since as you continue to make payments on your mortgage, there is less principal for MPI to pay off if you pass away. In general, the more equity you already have in your home, the less useful an MPI death benefit becomes.

Some insurance companies attempt to mitigate this by offering a payout level that does not change (known as a level death benefit), or a policy that returns premiums if you do not file a claim over the length of the policy. While these are both improvements on a declining benefit policy, they will likely come at the cost of a higher premium.

Even with the return of your premium, there are drawbacks. Inflation will have decreased the buying power over time, and you will have lost the potential for up to 30 years of compounding returns through other uses of the money.

There are a few other things to consider when weighing MPI vs. other insurance products. What percentage of your overall life insurance needs does MPI cover? Are there exclusions that cover the method of your death (such as only paying in case of accidental death)? Is the MPI still valid if you refinance? Make sure you understand the coverages and exclusions in detail as you consider your insurance options.

MPI benefits some people because acceptance is usually guaranteed. That is important because it offers an alternative for people in poor health, high-risk jobs, or others that are difficult to underwrite for more traditional term-life insurance.

However, if you do qualify for traditional insurance, you can generally acquire coverage sufficient to cover your mortgage and other expenses, and often at a lower price. Term insurance also provides you known constant premiums over the entire term, while MPI typically is locked for a five-year period and may then adjust up (or down) to a limit specified in the policy.

If you do decide that you need MPI, do not automatically sign up for it through your mortgage company. Treat it like any other purchase and shop around for the most beneficial rates and terms.

For most people, MPI does not provide coverage that cannot be done better and more economically with other types of life-insurance products. However, for those who are difficult to insure, MPI is certainly worth considering as a means of protecting your family from having to deal with potential foreclosure to go along with your disability, job loss, or death.

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