Mortgage protection insurance: What is it and is it right for you?

Quick insights

• Purpose of MPI: Mortgage protection insurance (MPI) provides financial security by paying off your mortgage if you pass away, with some policies also covering critical illness or disability.
• MPI vs. other types of insurance: Lenders require other types of mortgage insurance (e.g., PMI, FHA MIP) to help offset their risk in case of borrower default. MPI is an additional policy borrowers can get to protect their investment by ensuring their mortgage is paid in the event of death or disability.
• MPI benefits and drawbacks: MPI offers peace of mind and no medical exam requirements, but it comes with drawbacks like decreasing coverage over time and limited flexibility in how the payout can be used.ec-mortgage-protection-insurance

When you’re in the process of securing a home loan, protecting your investment is likely top of mind. One way to do this is through mortgage protection insurance (MPI), a type of mortgage protection plan designed to pay off your loan in the event of your death.

While MPI can offer many benefits to homeowners, just like with any financial product, it’s important to fully understand what it is, how it works and how it compares to other types of insurance to ensure you’re getting the right protection for your loan.

What is mortgage protection insurance?

Mortgage protection insurance, sometimes called mortgage life insurance or mortgage payment protection insurance, is designed specifically to pay off a mortgage if the homeowner passes away during the term of their loan.

Unlike private mortgage insurance (PMI), which protects the lender if the borrower defaults on the loan, mortgage protection insurance protects the borrower's family and beneficiaries by ensuring they aren’t left with the burden of a mortgage payment they may not be able to afford.

Depending on the specific policy chosen, it can also include benefits for critical illness or disability. This means if you become seriously ill or disabled and are unable to work, the policy may step in to help cover mortgage payments so your home remains secure during challenging times.

How does mortgage protection insurance work?

Mortgage protection insurance works like a term life insurance policy. When you purchase an MPI policy, typically through an insurance broker or directly from an insurance company, you’ll pay a monthly premium—just like you would for other types of homeowners insurance policies.

This type of policy provides a decreasing benefit that aligns with your mortgage balance. MPI policies are usually tied to the length of your mortgage term, so the payout will align with what you owe.

What does mortgage protection insurance cover?

The primary coverage of MPI is the outstanding balance of your mortgage. The specifics of what MPI covers vary based on the policy and provider, so it’s essential to review the terms carefully before purchasing any type of coverage.

• Critical illness coverage: Some MPI policies can include coverage for critical illnesses. If you’re diagnosed with a serious illness—like cancer—or experience a heart attack or stroke, the policy pays off a portion or all of your mortgage, depending on the terms of the policy.
• Disability coverage: Certain MPI policies may offer disability coverage. If you become disabled and are unable to work, the policy could help cover your mortgage payments for a specific period, providing financial relief while you recover.
• Accidental death and dismemberment: Some MPI policies include accidental death and dismemberment (AD&D) coverage. This means if you die or suffer a severe injury in an accident, the policy will cover the mortgage balance or provide a lump sum.

Depending on your provider, you may be able to customize your MPI policy to include “additional riders,” like unemployment protection, which could help you cover mortgage payments if you unexpectedly lose your job.

It’s important to note that while MPI offers these specific coverages, it’s primarily designed to protect your mortgage rather than provide a broad financial safety net like traditional life insurance does.

Benefits of mortgage protection insurance

Having a mortgage protection plan in place can come with the following advantages:

• Financial security for your family: Mortgage protection insurance can help provide peace of mind by ensuring your mortgage is paid off in the event of your death, disability or critical illness, depending on the policy. This can help protect your loved ones from the burden of paying off the mortgage.
• No medical exam requirements: Unlike traditional life insurance, mortgage insurance policies usually don’t require a medical exam, making them easier to acquire for people who may have pre-existing conditions that would disqualify them from other types of insurance policies.ec-mortgage-protection-insuranceec-mortgage-protection-insurance
• Direct payment to lender: In the event of a claim, the insurance payout typically goes directly to your mortgage lender, helping to ensure your home isn’t at risk of foreclosure.

Drawbacks of mortgage protection insurance

There may also be a few disadvantages to MPI, depending on your financial situation:

• Decreasing coverage: One of the biggest drawbacks of mortgage protection insurance is that the coverage amount decreases over time as you pay the mortgage down. The mortgage premiums will typically stay the same, but the payout decreases as the mortgage balance lowers, which can make the policy less valuable over time.ec-mortgage-protection-insuranceec-mortgage-protection-insurance
• Limited flexibility: Unlike traditional life insurance policies, the death benefit from mortgage protection insurance is solely for paying off the mortgage. This means the family can’t use the funds for other expenses—like living costs, college tuition or debt repayments.
• Higher cost: While mortgage protection insurance can be affordable, especially for younger and healthier individuals, it’s often more expensive than a comparable term life insurance policy.ec-mortgage-life-insuranceec-mortgage-life-insurance This is because the no-exam requirement raises the insurer's risk.

Mortgage protection insurance vs. other insurance types

If you’re considering mortgage protection insurance, it’s important to understand how it compares to other types of insurance for mortgages you might encounter. Each insurance type serves a unique purpose, depending on the type of mortgage you have, so understanding their differences can help you make a decision that accounts for your needs.

MPI vs. private mortgage insurance (PMI)

As mentioned above, MPI pays off your mortgage in the event of your death, while PMI protects the lender if you default on your loan. MPI is optional coverage you can purchase separately and usually lasts the length of your loan, depending on your mortgage term. PMI can be canceled once you reach 20% equity in your home, while MPI remains in place for the term of the policy.ec-pmi-costec-pmi-costec-pmi-cost

MPI vs. FHA mortgage insurance premiums (FHA MIP)

FHA MIP, like PMI, protects the lender—not the borrower—while MPI is an optional choice. FHA MIP is mandatory for FHA loans, but it may be canceled after 11 years if you make a down payment of 10% or more.ec-fha-loan-good-creditec-fha-loan-good-creditec-fha-loan-good-credit FHA MIP typically lasts for the life of your home loan, while MPI covers mortgage payments or the entire balance of your mortgage for a specific term.

MPI vs. traditional life insurance

Traditional life insurance, whether term or whole life, could provide more flexibility to borrowers because the death benefit paid to beneficiaries can be used for any purpose—not just paying off your mortgage. Life insurance, like mortgage protection insurance, is optional coverage you can purchase independently of your mortgage.

MPI vs. USDA guarantee fees

USDA loans require borrowers to pay what’s known as a “guarantee fee,” which helps offset the cost of loan repayment in case of default. This fee is an essential part of the USDA loan structure and helps protect the lender. Chase does not offer USDA loans at this time.

MPI vs. VA funding fees

VA loans include a “funding fee,” which supports the Department of Veterans Affairs (VA) guarantee of the loan. This fee is mandatory for most VA loan borrowers and helps to fund the program. MPI is a voluntary insurance product designed to protect the borrower’s family by covering the remaining mortgage balance in the event of the borrower’s death.

What is the average cost of mortgage protection insurance?

The average cost of mortgage protection insurance can vary widely, depending on several factors specific to the policy:

• Age: Younger borrowers typically pay lower mortgage premiums, while older borrowers may face higher costs due to the increased risk of health issues.
• Health: Although many MPI policies don’t require a medical exam, some do consider basic health information. Borrowers with existing health conditions may experience higher premiums.
• Mortgage amount: The size of the mortgage plays a significant role in determining the premium. A higher mortgage amount will usually result in higher premiums because the insurance company is covering a larger potential payout.
• Term of the loan: The length of the mortgage term can also affect the cost. A 30-year mortgage may have different rates compared to a 15-year mortgage, with longer terms often resulting in slightly higher premiums.
• Policy features: Additional riders, such as coverage for disability or critical illness, will likely increase the overall cost.

Is mortgage protection insurance worth it?

The decision to get mortgage protection insurance depends on your financial situation, health and priorities. If you think potential health issues could prevent you from qualifying for term life insurance, setting up a mortgage protection plan could be a great option for you.

However, if you’re in good health and can qualify for a term life policy, you might find that the flexibility of this type of insurance works better for your budget. You should also consider how much life insurance coverage is needed beyond your mortgage, as it can cover a range of expenses, while mortgage protection insurance is used strictly for the mortgage.

In summary

Mortgage protection insurance is a specialized insurance product designed to pay off your mortgage in the event you pass away, ensuring your family isn’t burdened with mortgage payments. It’s different from private mortgage insurance and other types of coverage, which primarily protect the lender. MPI can offer additional options for critical illness or disability, though it has some drawbacks, like the decreasing coverage over time and the limited flexibility compared to traditional life insurance.