Mortgage protection insurance, known as MPI, is marketed to homeowners as a way to pay off their mortgage in case of death. MPI should not be confused with mortgage insurance, referred to as PMI or MIP.
MPI is a term life insurance product. Although it sounds good, it may be better just to get a term life policy with a large death benefit that can cover your mortgage for your beneficiary.
What is mortgage protection insurance?
“Mortgage protection insurance is a way to talk about insurance without mentioning dying,” says Mark Williams, CEO of Brokers International. Unlike a term life insurance policy that has the same premium, MPI premium rates and the death benefit decrease as your mortgage decreases.
Mortgage protection insurance is a term life insurance product, meaning it will end after a specified timeframe — in this case, after your mortgage term ends. Your insurance premium rates will decrease as your mortgage decreases. Also, unlike traditional life insurance, no medical exam is required for mortgage protection insurance.
The beneficiary for a MPI policy is usually the mortgage lender, but some policies allow you to select a beneficiary besides the mortgage company.
Williams said a person can name a spouse as the beneficiary on a mortgage protection insurance policy and the spouse will receive the money and can choose whether to pay off the mortgage or sell the house. If a person has an MPI and term life policy with the spouse as the beneficiary on both, then it can be a double windfall. However, the death benefit for the MPI policy will be the amount remaining on the mortgage loan.
Quick tip: If you have a mortgage and you don’t qualify for life insurance due to health issues, mortgage protection insurance is an alternative to protect your home.
MPI vs. homeowners, mortgage, and life insurance
Neither homeowners insurance nor mortgage insurance — either private mortgage insurance or mortgage insurance premium — are required by state law, but you may need both if you’re purchasing a home and financing it with a mortgage.
| MPI (mortgage protection insurance) | Homeowners insurance | PMI and MIP mortgage insurance | Term life insurance |
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If you have a mortgage, your lender will require homeowners insurance to protect your home and belongings and to protect you from liability if an injury happens on your property. If the mailman slips and falls on your sidewalk, the dog bites a guest, a tree falls on your roof, or a kid is injured using your swimming pool, homeowners insurance can protect you.
If you have a mortgage and your down payment is less than the average 20%, your lender will require mortgage insurance to protect them in case you default on your mortgage payments.
The two major differences between term life insurance and mortgage protection insurance are the death benefit and how premiums are calculated. MPI premium rates and the death benefit decrease as the mortgage decreases. With most term life insurance policies, the premium and death benefit remains the same during the period of the policy. Also, most term life insurance policies require a medical exam, but MPI doesn’t require a medical exam.
How much does mortgage protection insurance cost?
Your mortgage protection insurance policy is based on your mortgage loan amount, so the details will vary depending on the cost of your home loan. MPI premium rates decrease as your mortgage decreases, but premiums are typically more expensive than a traditional term life policy.
When selecting your death benefit amount for term life insurance, the rule of thumb is to select 10 times your annual income to cover the mortgage, education for dependents, and other costs if you die. For example, if you make $75,000 per year, then you would purchase a life insurance policy for $750,000. Generally, you’ll probably want to get as much life insurance as you can comfortably afford each month. If it would be a struggle to make your premium payments, it’s probably too much for you.
Is mortgage protection insurance better than term life insurance?
If you have a mortgage and you don’t qualify for traditional life insurance due to health issues, mortgage protection insurance is a good option. Like other no medical exam term life insurance policies, MPI will be more expensive because there is no health exam to determine your insurance risk.
Your MPI policy terminates when your mortgage is paid off. If you pay off your mortgage early or pay it before you die, then you’ll be left without a death benefit — unless you have other life insurance. Is it worth it to have two premiums for separate MPI and term life insurance policies? Probably not, especially if you have a large death benefit from your term life insurance policy that can cover your mortgage and other expenses.
The best life insurance policy for you depends on your budget and financial situation. It’s wise to consult an accountant and financial advisor to determine which policy fits your financial needs and goals. It’s worth taking the time to find the best policy for you, because once you’ve signed on the dotted line, it’s a lot more difficult to make changes if you need to adjust your coverage.
Ronda is an attorney, writer, and entrepreneur. She is a contributing writer for the Huffington Post. Originally from Chicago, she has lived in Los Angeles and New York. She loves to travel and is passionate about education equity, especially for first generation college students.