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The promise of mortgage protection insurance, or MPI, is simple and appealing — when you die, the policy pays off your mortgage, and your loved ones can keep the house. But the reality is more complex. For many people, a term life insurance policy can be a cheaper, more flexible option.
» MORE: Term life insurance definition
What is mortgage protection insurance?
Mortgage protection insurance (also called mortgage life insurance and mortgage protection life insurance) is a policy that pays off the balance of your mortgage when you die. The life insurance death benefit from an MPI policy typically decreases as you pay off your mortgage, while your premiums stay the same.
How does mortgage protection insurance work?
Mortgage life insurance is often sold through banks and mortgage lenders instead of life insurance companies. Its purpose is to ensure your home is paid off if you die with an outstanding balance on the loan.
The reason lenders like mortgage life insurance is simple — they're the ones who get paid if you die. The death benefit of a normal life insurance policy goes to your chosen beneficiaries, like your family members. But with an MPI policy, the beneficiary is the lender, who will be paid the remaining balance of your mortgage.
» MORE: How much life insurance do I need?
Did you know...
Mortgage life insurance is similar to decreasing term life insurance, except your lender — not your loved one — gets the payout if you die while the policy is in effect.
Pros and cons of mortgage protection insurance
Mortgage protection insurance has limited advantages and serious drawbacks, especially compared to other types of coverage, like term life insurance.
Pros
Convenience. Mortgage protection insurance aligns with your loan balance and pays the lender directly.
No medical exam. Policies are typically guaranteed, so you’re not required to take a life insurance medical exam to qualify for coverage.
Cons
Lack of flexibility. MPI pays the lender, so your family won’t have the freedom to spend the money as they like.
Declining payout. While premiums stay the same, the payout decreases as you pay down your mortgage.
Higher premiums. Premiums for MPI are often much higher than term life insurance.
» MORE: Benefits of term life insurance
Mortgage protection insurance vs. term life insurance
A term life insurance policy typically provides more bang for your buck than a mortgage life insurance policy. That’s because term life allows you to choose your coverage amount and policy length, and offers level premiums and death benefits. Plus, the payout can be used for any purpose. If your family wants to use the money to pay off the mortgage, they can but, they’re not forced to.
In short, term life offers most of the benefits of mortgage protection insurance but with lower premiums, more flexibility and more control.
» MORE: Mortgage life insurance vs. term life
Is mortgage protection insurance required?
You are not required to buy mortgage protection insurance. However, there are other types of insurance that can be mandatory for certain home loans, such as private mortgage insurance.
What’s the difference between MPI, PMI and MIP?
When referred to by their abbreviations, mortgage protection insurance, private mortgage insurance and mortgage insurance premium can be easy to mix up. Here's a bit about each:
Mortgage protection insurance, or MPI, is a type of credit life insurance. You aren’t required to purchase it, and it pays the lender instead of your beneficiaries.
Private mortgage insurance, or PMI, is a type of insurance that your lender can require you to purchase if your down payment is less than 20%.
Mortgage insurance premium, or MIP, refers to a type of mortgage insurance required for FHA loans, which allows for down payments as low as 3.5%.
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Frequently asked questions
Is mortgage protection insurance worth it?
In many cases, term life insurance is a better match for most people because it offers flexibility and can provide funds for beneficiaries to balance mortgage payoff and other financial responsibilities. However, If you’ve been denied term life insurance or whole life insurance for medical reasons, you may want to consider mortgage life insurance.
Do I need mortgage protection insurance?
Mortgage protection insurance isn’t required and most people will find more value and flexibility with other life insurance policies like term life insurance.
What does mortgage protection insurance cover?
Mortgage life insurance pays the outstanding balance on your home loan directly to the lender if you die before paying it off.
FAQs
Mortgage protection insurance pays off your mortgage when you die, but it may not be worth the cost.
What is mortgage protection insurance and do I need it? ›
MPI is a type of insurance policy that helps your family make your monthly mortgage payments if you – the policyholder and mortgage borrower – die before your mortgage is fully paid off. Certain MPI policies also offer coverage for a limited time if you lose your job or become disabled after an accident.
What does mortgage protection cover mean? ›
Mortgage protection insurance is a type of income protection that will cover your mortgage payments if you're out of work due to accident, sickness or unemployment.
What is the average cost for mortgage protection insurance? ›
The monthly premium for a MPI policy can range from as little as $5 per month to $100 per month.
How do I get rid of mortgage protection insurance? ›
Ask to cancel your PMI: If your loan has met certain conditions and your loan to original value (LTOV) ratio falls below 80%, you may submit a written request to have your mortgage servicer cancel your PMI. For more information about canceling your PMI, contact your mortgage servicer.
Is mortgage protection a must? ›
This is a particular type of life assurance that is taken out for the term of the mortgage. It pays off the mortgage if you, or someone you have the mortgage with, dies. The lender is legally required to make sure that you have mortgage protection insurance before giving you a mortgage.
Do I really need to pay mortgage insurance? ›
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home need to pay for mortgage insurance.
What is the mortgage protection insurance scandal? ›
The PPI scandal was at once a thorn in the side of banks and a boon for so-called claims management companies and their armies of cold callers, and centred on the mis-selling of insurance policies that were sold alongside mortgages, credit cards and loans since the 1990s.
How does mortgage insurance work in case of death? ›
With mortgage life insurance, the death payout goes directly to your mortgage lender. With term life insurance, the death benefit goes to your beneficiary who can use the money as they see fit (including paying off the mortgage).
What is the age limit for mortgage life insurance? ›
Age Limits
As with other types of life insurance, mortgage life insurance may not be available after a certain age. Some insurers offer 30-year mortgage life insurance to applicants who are 45 or younger, and only offer 15-year policies to those 60 or younger.
Texas clocks in as the state with the most insured homeowners, with more than 89,000 having an insured mortgage loan. Flroida took second with 77,000 insured homeowners, while California (71K), Illinois (48K) and Ohio (43K) rounded out the top five.
How much is mortgage insurance on $300 000? ›
But in general, the cost of private mortgage insurance, or PMI, is about 0.5 to 1.5% of the loan amount per year. This annual premium is broken into monthly installments, which are added to your monthly mortgage payment. So a $300,000 loan would cost around $1,500 to $4,500 annually — or $125 to $375 per month.
Is mortgage protection insurance cheaper than term life insurance? ›
On top of this, mortgage life insurance premiums stay the same, so you won't pay less as you pay down your mortgage, even though payout decreases with each mortgage payment. Term life insurance is typically much more affordable than mortgage life insurance since its premiums are based on your individual risk.
What is the 2 year rule for PMI? ›
For loans that are between two and five years old, the PMI can be removed using the home's current market value when the loan-to-value (LTV) is 75% or less. There is an exception to this 75% LTV guideline. Mortgage insurance may be removed when substantial improvements have been made and the loan is 2 to 5 years old.
Can I decline mortgage insurance? ›
To request cancellation of PMI, you should contact your loan servicer when the loan balance falls below 80 percent of your home's original value (the contract sales price or the appraised value of your home at the time it was purchased).
When can I cancel mortgage protection insurance? ›
Even if you don't ask your servicer to cancel PMI, in general, your servicer must automatically terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. For your PMI to be cancelled on that date, you need to be current on your payments.
Do I need a mortgagee protection clause? ›
Do you need a Mortgagee Protection Clause? A Mortgagee Protection Clause is often required by lenders. Without the clause in place, your landlord can commence proceedings to forfeit the lease.
Do you need mortgage insurance and homeowners insurance? ›
A lender will require different types of mortgage insurance depending on the type of loan you apply for. For example, conventional loans could require that you purchase PMI if you put less than 20% down. You may be required to have both home insurance and mortgage insurance, depending on how you pay for your home.
What happens to my mortgage if I become disabled? ›
What is mortgage protection insurance? Mortgage protection insurance is an insurance policy that pays off the remainder of your mortgage if you pass away or if you become disabled and can't work. In that way, it functions similarly to life insurance and disability insurance.
