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How Mortgage Protection Insurance Works

Understanding Mortgage Protection Insurance

For most people, closing on a home equity line or mortgage is their largest investment. Mortgage protection insurance (MPI) or mortgage payment protection insurance (MPPI) is a form of life insurance that pays off your mortgage in the event of death, illness, or disability.

Monthly mortgage payments are often the biggest expense. As a breadwinner, being unable to work due to disability or illness greatly impacts your family’s finances. To avoid losing your home, you’re required to keep up the payments.

There are two options to protect you and your family. You can apply for protection insurance to take care of the mortgage payments or go for general income protection insurance.

What Is Mortgage Protection Insurance (MPI)?

As a new homeowner, you may have already gotten more than a few calls regarding mortgage protection insurance. So why do mortgage lenders insist on life insurance?

The main aim of mortgage protection is to make sure you can still pay off your mortgage if you are unable to work or no longer have a secure source of income. This insurance will make your mortgage payments until you can go back to work or until the payment period ends.

If your death occurs within the term of the policy, your beneficiaries get a death benefit. The insurance provider pays your lender the remaining balance.

The monthly payment costs vary based on the mortgage amount, your health, and your age.

MPI policies generally cover only the principal amount plus interest. The other additional fees, such as property taxes, homeowners insurance, and HOA payments, are up to you. To cover the extra payments, you can include a policy rider.

Different Types of MPI

Reducing Term Policy

As you continue paying your mortgage, the amount covered by the policy decreases as the remaining balance of your mortgage reduces. Your premium remains the same, but the coverage level reduces.

The policy typically ends when the mortgage gets paid off.

Level Term Policy

In this type of policy, the premium you’ll pay and the amount your insurance is worth remain at the same level. You’ll get the same coverage level all through the mortgage term.

In the event of death before the mortgage is fully paid, the insurance provider pays the original insurance amount. Any balance that remains after paying the mortgage goes to your beneficiaries.

 Serious Illness Cover

You have the option of adding a serious illness cover to your MPI policy. In this case, your mortgage payments will still be paid if you get diagnosed with a severe medical condition that’s under your policy cover. This type of cover is a bit expensive in comparison to the other types.

Life Insurance Policy

If you have life insurance with mortgages, is it compulsory to purchase MPI? The simple answer is no. If you have a life insurance policy, your beneficiaries can apply the payout to your mortgage in the event of your death. If you are concerned about your life insurance policy not being enough to cover your mortgage, you can always increase your policy.

Veterans Mortgage Life Insurance (VMLI)

Veterans Mortgage Life Insurance covers home mortgages for severely disabled Veterans and service members. The insurance covers mortgage costs for veteran families if the disability has a connection to their service and they need Specially-Adapted Housing to suit their needs.

Since VMLI is a decreasing term mortgage life insurance, the insurance coverage reduces over the lifetime of the loan. The premium varies depending on the outstanding mortgage balance.

The coverage of VMLI ends when the mortgage gets paid in full, and the maximum amount offered by the benefit is $200,000. VMLI has no cash value, pays no dividends, and is impossible to use when applying for another loan.

Is Mortgage Protection Insurance Required?

Purchasing mortgage protection insurance is not mandatory, so this decision is entirely up to you. MPI policies are most beneficial if you fail to qualify for term life insurance due to age or health conditions. Before signing up, request several quotes from insurance providers and compare their financial strengths.

To avoid policies with declining payouts, you can opt out of those with medical-exam terms, level death benefits, and level premiums. You may incur a higher cost, but your beneficiaries get the same benefits regardless of when your death occurs.

If you’re still in the initial stages of mortgage payments, you can select a policy with broader coverage at a lower price. After paying off a significant principal amount, you should consider transitioning into a policy with a guaranteed issue term.

Most people opt for a term life insurance policy. Besides the affordability, these policies offer more protection and are more flexible. Since your home is a crucial investment, it’s essential to protect it. Instead of getting an MPI, you can go for a homeowners insurance policy. As you continue with your mortgage payments, your home and any property attached to it get protection.

Do You Need Mortgage Protection Insurance?

MPI is not a necessity and is often not the best financial move. If your financial stability is rocky or your life insurance coverage doesn’t facilitate mortgage or loan payments in case of death, you can get MPI. People who can’t get life insurance because of a health condition should look into MPI if they have a mortgage, as it is often easier to acquire than other life insurance policies.

However, if your life insurance policy is adequate to pay off your loan, cover your expenses, and substitute your income for a certain period, you don’t need MPI.

Why You Should Not Buy Mortgage Protection Insurance

The policies lack the flexibility that comes with regular term life insurance policies. Since the insurance provider pays the lenders directly, your beneficiaries cannot use the funds to cover other expenses.

Additionally, the premiums are expensive. As a healthy person, these costs are actually higher than standard life insurance policies. There’s also limited transparency compared to other insurance types. It’s hard to get online quotes for MPIs due to the varying prices.

It’s common for the monthly premiums to change. Most policies have a fixed premium for the first five years. After this period, the amount can change unpredictably.

The reducing amount of death benefits is also a disadvantage. Since the death benefit amount is equal to the outstanding balance on your mortgage, there is minimal flexibility. The level premiums mean you’ll keep paying similar premium rates while getting lower coverage with time.

MPI policies have limited terms and coverage amounts, as well as restrictions on age. The result is a strict policy that provides minimal protection.

Featured Image: Twenty20

About the author: Liam McGillivray is a writer and editor at Wealthy Millionaire. He holds a Master's degree in Public History from the University of Victoria and a BA in History and Classical Studies from Queen's University. His interests include fantasy literature, NFT gaming, and film studies.

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