Buying a house is one of the biggest and most important investments in your life. And like all investments you want them to be protected. Especially when they provide a warm and safe place for you and your family to live.
One of the primary reasons for life insurance is to cover a mortgage. However, with so many options out there for coverage, how do you know which one is the best for you? Should you get an insurance policy specifically for your mortgage?
Continue reading to learn the importance of mortgage protection insurance (MPI) and why you may need it!
Mortgage Protection Insurance (PMI) is a form of life insurance that is specifically aimed at protecting your family and home should anything happen to the person who is the primary financial supporter. Private mortgage insurance doesn't just cover death but also covers loss of job and disability.
MPI is like other life insurances in that you purchase a policy and pay monthly or annual premiums to maintain the policy. However, beyond that, there are a few key differences between MPI and your typical life insurance.
Usually, the beneficiary of the life insurance policy is a family member (spouse, parent, sibling, etc.). However, with a PMI, the beneficiary is the loan lender.
Because the MPI is meant to pay the mortgage the family is bypassed entirely and the payout is sent directly to the lender. It's important to note there won't be a "refund" from the lender to the family in the case of overpayment.
The balance of the insurance policy payout changes over the lifetime of the mortgage loan. This is because the MPI is solely designed to pay off the loan in the event of the primary source of incomes death or disability.
The payoff amount will lower as the amount left on the loan decreases. This is why there will be no refund from the lender to the surviving family members in the event of overpayment, there will be no overpayment.
The length of the MPI is typically locked in at 15 or 30 years, usually to match the length of your home loan. This differs from other life insurance term lengths that usually cover 5 or 10-year increments or sometimes totally custom options.
The biggest benefit of the MPI is the almost guaranteed acceptance by mortgage lenders. Because the MPI ensures the lender will get their money back in the event of loss of income, disability, or death, they are more likely to approve your home loan request.
The MPI is also beneficial to those who work in a volatile industry where your income is constantly at risk. The PMI will provide mortgage coverage in the event of a loss of income due to job loss or reduction in wages.
It will even be beneficial and attainable for those who can't get disability due to their high-risk occupation. These are jobs where the risk of injury is high and therefore don't usually offer disability because you accept the risk.
What most MPI businesses don't tell you is that you can actually get term life insurance for cheaper and with more coverage. Both term life insurance and MPI will cover your mortgage in the event of death or disability.
In fact, the average nonsmoking homeowner will pay less for term life insurance policies than they would for MPI.
The typical MPI is around 0.5 to 1% of the total loan amount. Divide that by 12 and that's how much will be added to your monthly mortgage payment. For example, on a $200,000 house, the annual cost of the MPI would be 2,000 at 1%. That comes out to $166 added to your mortgage a month.
Another downside is the amount of payout and the beneficiary of the MPI.
As mentioned earlier the MPI will payout to the lender not to the surviving family members in the event of death. Term life insurance, however, will pay out to the surviving family members designated as beneficiaries by the policyholder.
This means after all the debts are settled, depending upon the amount of the policy, there could be money left over that would go directly to your designated beneficiaries to be used how they see fit.
Ultimately, whatever the choice you make to protect your loved ones and your home from the burden of debt and foreclosure is up to you. But it helps to make sure you make a well-informed decision.
There are multiple things to consider when determining if you need an MPI or not. While the benefits of being insured, practically being guaranteed a loan, and acquiring insurance which you otherwise may have been denied are all upsides to the MPI.
However, it's also important to take in the downsides as well, such as the no payout to your surviving family members or the cost of the MPI. These are equally important and should be weighed equally with the upsides.
There are also alternative choices to the MPI such a standard term life insurance policy which could be cheaper, last longer, and leave your family with something after having paid all the bills.
If you're interested in purchasing the best insurance policy for you and your family, but still have questions about which policies are best for you, contact us today!