Mortgage life policies allow families to retain ownership of a home without worrying about the mortgage. It works like any other life insurance policy, but the policyholder’s primary goal is paying off their mortgage at death.
There are several benefits and considerations for MPI policies, and it’s not the best fit for every family. Learn more below to decide if this life insurance is right for you.
How Does Mortgage Life Insurance Work?
Mortgage protection insurance works like other life policies and pays a lump sum benefit in the event of the homeowner’s death. A named beneficiary receives the payment, which is intended to pay the home’s remaining mortgage balance. However, the beneficiary can use the funds as they like.
This is typically a term life insurance policy that matches the length of your mortgage agreement — usually 15 or 30 years, or as many years as you have left on your loan.
Permanent life policies are available, but they’re uncommon because the premiums to cover mortgage costs are quite high.
If the term policy ends and the house is paid off prior to the policyholder’s death, the policy will expire without paying the benefit. The policyholder can choose to convert the term policy into a permanent life policy instead.
Homeowners can choose between level term and decreasing term insurance, which affects the policy size and premiums.
- Level term insurance: policy payouts and premiums remain the same throughout the term.
- Decreasing term insurance: policy payout size decreases over time with consistent premium costs.
Level term policies are a fit for interest-only mortgage agreements or homeowners wanting to transfer their mortgage life insurance into a permanent policy.
Decreasing term insurance is uncommon and hard to find, but it may be a good choice for homeowners that don’t intend to convert their term policy to permanent life insurance.
Mortgage life insurance finishes paying a policyholder’s mortgage with a lump sum payment after they pass away. The payout goes to the named beneficiary and is typically tied to the mortgage amount.
The benefit may not be enough to pay property taxes and mortgage insurance, but homeowners can increase their policy coverage to include these housing expenses.
These policies aren’t intended to provide a death benefit for final expenses or inheritance benefits for loved ones. Separate permanent and term life insurance policies are a better fit for estate planning.
MPI Advantages And Disadvantages
Mortgage protection insurance works the same as other life insurance policies and plays an important role in providing security and financial assets for your loved ones.
Here are some pros and cons to know before committing to an MPI policy.
- You can establish riders that provide living access to funds in case of terminal illness or return your premiums if the policy term ends while the policyholder is living.
- You may convert MPI term policies into permanent life insurance policies once you’ve paid off the mortgage.
- Medical exams and health evaluations are required.
- Death benefits are typically tied to the mortgage balance.
Mortgage Life Insurance Vs. Traditional Life Insurance
Mortgage life insurance policies aren’t actually any different than traditional life insurance. Policyholders get to choose their coverage, term, and beneficiary in either case.
The only difference is the policyholder’s intention to pay off the mortgage balance. With this purpose in mind, the mortgage life policy might match coverage with the mortgage balance and align the policy’s term with the mortgage repayment schedule.
A mortgage life insurance policyholder can name any beneficiary they like, but they’re likely to choose someone who will be responsible for the house after their death. These beneficiaries are likely to use the cash benefit to cover the mortgage, but they can ultimately spend it as they see fit.
Is Mortgage Life Insurance the Same Thing As PMI?
Mortgage life insurance is not the same as private mortgage insurance (PMI).
Private mortgage insurance is arranged by the mortgage lender to protect their interests if the homeowner is unable to make their mortgage payments. Lenders sometimes require it if the homeowner has a less than 20% down payment for a conventional loan. The homeowner pays PMI premiums upfront or as part of their mortgage payments.
Mortgage life insurance still guarantees that the lender is paid, but it activates in the case of the borrower’s death — not missed payments. It also secures homeownership for the homeowner and their family rather than protecting the lender.
When And Where To Buy
The best time to buy mortgage protection insurance is after you buy your house. Some insurance providers will limit your ability to secure a policy to 24 months after closing, while others give you years to buy a policy.
If you decide MPI is right for you, you have a few buying options:
- Private insurance: find a private insurance company specializing in mortgage life insurance.
- Life insurance broker: life insurance providers often cover mortgage policies, too, so you can bundle your life insurance policies for a discount.
- Home-buying team: while your real estate agent and lender aren’t insurance brokers, they likely have industry connections. Connect with your home-buying team for trusted insurance recommendations.
Most insurance providers will allow you to explore policies and costs online. Shop around and get insurance quotes to compare offers.
Mortgage life insurance often costs more than other life insurance policies, but it doesn’t usually exceed $100 a month and can be as low as $20. Premiums depend on your age, policy amount, term, and location.
You can secure an MPI term life policy up to age 80, but the older you are, the more difficult it can be to find the right policy. There may be term limits or increased premiums for those older than 60.
Yes, life insurance policies can pay off a mortgage. Mortgage life insurance is a type of term life policy that is designed to pay mortgage premiums, and beneficiaries of any life insurance policy can also use the payout to pay a mortgage.
Life Insurance For Every Situation
Beyond mortgage protection insurance, there are life insurance policies available to help you pay funeral expenses, cover dependents’ education costs, and even leave an inheritance for your loved ones.
Learn more about life insurance to determine what policy is right for you and your family.